Understanding the new R&D regulations: cloud computing, data license and pure mathematics

Understanding the new R&D regulations: cloud computing, data license and pure mathematics

Duncan Edwards, Incentives and Reliefs Senior Manager at Markel Tax, explains the motivations behind the recent changes to the R&D regime

Understanding the new R&D regulations: cloud computing, data license and pure mathematics

April 2023 saw the introduction of new rules around claiming tax credits for investment in research & development (R&D) projects. Amongst the changes is one that applies to three core development tools, namely cloud computing and cloud services, data licences and the use of pure mathematics. The changes affect which aspects of these tools are eligible for relief under the R&D scheme.

With these changes, HMRC’s aim is to tie up loose ends that have been the subject of past disputes and reflect the changing use of technology in business.

Cloud computing and cloud services

Recent years have seen organisations increasingly move away from physical machines to cloud computing solutions for development purposes. Funding virtual servers can become a significant part of total R&D budgets and HMRC has now recognised that these are legitimate costs that should be eligible within claim applications.

The rules are very specific, however, and cover only expenditure that can be proven to be a development expense associated with uncertainties and technological advances. They do not cover expenses that produce revenue – it has to be proven that the expense was for development only and that no revenue has been generated from the activity.

This will be helpful in scenarios where developers would benefit from a more powerful server but their employers may have, in the past, been reluctant to make the additional investment.

The new rules cover not only cloud servers themselves, but also data storage. If investment has been made for the storage of data which has been necessary for the R&D itself and is not to be applied to the business, it falls within the new rules. However, HMRC will need to see records showing the time and reason for accessing the data. Ideally, this information should be recorded in real time to ensure accuracy, which is especially useful in the event of HMRC requesting additional information.

Data licences

HMRC has also sought to deliver greater clarity around data licences. We are all aware of the growing importance of data and the rapidly increasing levels of data utilised by businesses of all sizes. HMRC has recognised that data often has to be used in R&D to test new software and systems during development phases.

The potential for relief will help companies invest in more robust data sets and avoid the risk of testing using substandard data, which can be crucial to the success of a project. The data has to be used specifically for R&D and cannot be held on a production server at the same time. If the data is making a company money, it falls outside the scope for relief.

In addition, the data cannot be owned. It needs to be licenced and leased, and HMRC will expect to see proof of this. Data gathered by a business themselves also does not qualify but certain staff costs associated with gathering that data could be claimed for. However, careful time and reason records will need to be kept to sufficiently prove these costs to HMRC.

Pure mathematics

HMRC has not, up to this point, been clear on how the use of pure mathematics should be treated from the perspective of an R&D claim. Previously, the use of pure mathematics would often not been properly identified by those involved in preparing a claim, which has led to disputes with HMRC. The new regulations now attempt to clarify this area.

Pure mathematics is the study of mathematical concepts that do not have any application outside of mathematics. Being able to claim for this work gives companies the potential to invest more in what is often the crucial starting point for development.

Pure mathematics costs need not have a business application at the time they are incurred. Needless to say, however, this type of work will sometimes have development applications in the future. A good example is GPS systems, which would not be accurate without mathematicians having calculated the different rate time moves in space compared to the ground.


As Incentives and Reliefs Senior Manager at Markel Tax, Duncan Edwards is a specialist in the field of IT and software development and their application to the R&D scheme.

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