Inclusion of cloud and data costs in list of qualifying expenditures means extra capital for companies working on AI-related projects.
The government has added data licensing and cloud computing costs to the list of expenditures that qualify for R&D Tax Relief.
This change, which affects accounting periods starting on or after 1 April 2023, is designed to keep the scheme aligned with modern R&D practices, to which cloud computing and data are increasingly vital.
This change is extremely good news for companies working on artificial intelligence. Training AI algorithms requires huge quantities of training data and computing power. Thanks to the expansion of qualifying costs, companies involved in AI are now able to recoup up to 27p per £1 they invest in cloud resources and datasets, unlocking potentially tens of thousands of pounds in additional funding.
Here’s a rundown of cloud and data-related costs that are now eligible for relief.
Are my cloud and data costs eligible for relief?
Before diving into which cloud and data costs qualify for R&D Tax Relief, let’s look at some important rules covering both types of expenditure.
First, your cloud and data costs must directly involved in resolving a technical or scientific uncertainty.
In simple terms, uncertainties are moments in your development work where you and your team do not know how to proceed. Where your only hope of progressing towards the advance you are trying to make is by experimenting.
Second, you cannot claim for data and cloud costs connected to qualifying indirect activities.
Qualifying indirect activities are activities that support development work – training or recruiting staff, for example – but do not directly contribute to the resolution of an uncertainty.
Third, if you are using a data license or cloud solution for both qualifying and non-qualifying or ‘routine’ activities, you’ll need to reasonably apportion a percentage of its cost to your qualifying development work.
This means you’ll need to attribute some fraction of the total cost to your claim based on how much of that resource was used in your R&D.
It’s important to keep evidence that corroborates your apportionments. One type of evidence you could keep is timesheets that record when you used a particular cloud solution and what you used it for.
Now, let’s look at which data and cloud costs qualify for relief.
Stay up to date with GrantTree's newsletter
Keep up to date with all the latest news from HMRC and the R&D Tax scheme with GrantTree’s newsletter.
Qualifying Cloud Computing Costs
To qualify for relief under the new Cloud Computing Services category, a cost must relate to “the provision of, access to, and maintenance of, remote data storage and hardware facilities and operating systems and software platforms.”
Costs related to creating your own cloud infrastructure wouldn’t qualify under this category. However, some expenditures connected to this work, such as wages for staff involved in building your cloud infrastructure, may qualify under a different category.
Qualifying Data Licenses Costs
Data licensing refers to paying for “access and use a collection of digital data. This includes data sets which could be licenced in various ways (such as data feed subscription or data as a service).”
The distinction between licensing and purchasing data is important here. The cost of licensing data may qualify for relief. However, the cost of purchasing data will probably count as a capital expenditure and won’t be eligible for R&D Tax Relief.
If you are contractually allowed to sell the data you’ve licensed to someone else, you won’t be able to claim relief on the cost of licensing it. This is to prevent companies from claiming relief on costs that can be recouped by other means, such as selling data to another company.
However, you may be able to claim relief on licensed data that you sell if you have transformed it to the point where the “initial inputs”, i.e. the original data you licensed, cannot be identified. This is a real grey area. If you are looking to resell licensed data, it’s best to consult an R&D Tax Relief specialist like GrantTree.
Investment in creating your own dataset would not count as a type of qualifying data license cost. However, it may qualify under a different category. Alternatively, it may count as capital expenditure.
Let GrantTree make sure you compliantly access your additional funding
The government’s reforms have created a huge opportunity for AI innovators: a large, additional source of funding they can use to fuel growth and further R&D.
The challenge for AI companies is to incorporate these newly eligible costs into their claim in a way that is fully compliant with the latest legislation. This is a challenge that – as the 1900% increase in HMRC’s enquiry rate demonstrates – many companies are struggling with.
If you want to claim the additional funding that is now available to you and avoid compliance issues that could delay your funding for several months, GrantTree is here to help.
We have 14 years’ experience preparing compliant claims and have helped countless companies safely navigate changes to the R&D Tax Relief scheme. Our team of tax and technical consultants will make sure your claim is 100% compliant and incorporates all eligible costs, including those connected to data licenses and cloud services.
For expert help on your upcoming claim, just get in touch.
