UK expenditure involves the activities carried out by the subcontractor as part of the R&D project taking place in the UK. For instance, employees of the subcontractor who are engaged in R&D activities will be performing their duties in the UK. Consumable items used by the subcontractor will need to be used in R&D in the UK, even if sourced from elsewhere. Additionally, software, data, and cloud services employed by the subcontractor will be used for R&D activities carried out by workers in the UK, even if sourced from elsewhere.
Qualifying overseas expenditure (QOE) refers to expenditure on R&D undertaken outside the UK, where specific factors apply. To be considered QOE, all three of the following factors must apply:
- The conditions necessary for the R&D must not be present in the UK.
- The conditions must be present in the location where the R&D is being undertaken.
- It would be wholly unreasonable to replicate the conditions in the UK. However, cost and availability of workers are excluded from meeting the conditions.
It’s worth noting that explicit legislative requirements are included in qualifying overseas expenditure. This would only apply in a case where a company is explicitly legislatively required to perform R&D outside of the UK, and HMRC would expect to see ‘clear, independent evidence that this was the case’.
Cloud computing costs
For accounting periods starting on or after 1st April 2023, costs associated with data licence and cloud computing services can be included as qualifying expenditure for the R&D tax relief scheme, but there are some general exclusions. For example, if a business has a contractual right to sell data onward, it cannot claim expenditure on the licence or service costs. Similarly, if the business has a contractual right to publish, share or otherwise communicate data with a third party, it will not be able to claim expenditure on the licence or service costs. However, there is an exception where the data is published, shared, or communicated with a third party for the purposes of communications reasonably necessary for, or incidental to, the relevant R&D.
Additionally, qualifying indirect activities (QIAs) are not treated as attributable to relevant R&D when they are incurred in relation to data licenses or cloud computing services. QIAs include activities such as marketing and sales, general management, and legal services.
Cloud computing services are specifically defined to include the provision of, access to, and maintenance of remote data storage and hardware facilities, as well as operating systems and software platforms. This means that an apportionment of expenses incurred for these services can be considered qualifying expenditure if they are necessary for the R&D process.
From 1st April 2023, companies in the UK that are claiming Research and Development (R&D) tax relief will need to submit a Claim Notification form for their claim to be valid. This applies to first-time R&D claimants and those who have not made an R&D claim in any of the previous three calendar years.
The Claim Notification form must be submitted no earlier than the first day of the accounting period to which the claim relates and no later than six months after the end of the period of account that includes the relevant accounting period. The information that must be included in the notification is the company’s Unique Tax Reference (UTR) number, the contact details of the main internal R&D contact at the company, the contact details of any agent involved in the R&D claim, and the start and end dates of the relevant accounting period.
Addition of Mathematics
With the legislation to date, advances in pure mathematics would not qualify for R&D tax relief; and expenditure that sought such advances could not be claimed.
HMRC have since announced activities relating to pure mathematics that meet the updated definition could be eligible for R&D tax relief. This change will expand the number of businesses that may be able to claim relief, and companies will now be incentivised to pursue advances in pure mathematics.
Additional information form
For accounting periods starting on or after 1st April 2023 claim will need to submit an additional information form either before or at the same time as the claim. The full list of the information that will be included in this form can be found here Research and Development (R&D) tax reliefs – draft guidance – GOV.UK (www.gov.uk)
From the 1st of April 2023, to qualify for R&D tax credits, payments to subcontractors must be UK based expenditure. Payments made to externally provided workers (EPWs) must be subject to PAYE and National Insurance contributions unless it is qualifying overseas expenditure.