Cloud Costs

Learn about how the rules for claiming cloud costs are changing in April 2023

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Cloud Costs- Changing Criteria

After negotiations with industry groups, academia and the civil society, the Chancellor announced in the 2021 Autumn budget that the criteria for qualifying R&D expenditure was expanding to include the costs of data and some cloud services. The decision was motivated by the governments interest in supporting modern research and ‘more effectively capturing the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK’.  Under this reform, businesses who qualify for R&D would now be able to claim for expenditures attributed to certain cloud services, such as computation, data processing, and software.

Taking effect from April 2023, the decision was welcomed overwhelmingly as cloud services can in many cases be central to the running of an R&D project. Therefore, the government’s decision to include subsidy for this in the budget has been widely conceived as a rational step. Cloud services in the past have given capacity for large scale R&D projects and have been the driving force of innovation. Harvard Business Review reflect upon the Concorde supersonic transport programme, ‘which took 25 years and $5 billion (adjusted for inflation) to launch its first flight in 1976.’ Contrastingly, Cloud has been a principal contributor to the enhanced efficiency of the 2014 Boom Supersonic programme, which ‘promises to cut air travel time in half, shuttling passengers between New York and Paris in 3.5 hours’. The Overture supersonic airliner, the end product of the programme, is expected to be delivered in half the time at a fraction of the cost. Cloud software simulation capacities ‘allowed the company to replace most of the physical prototyping and wind-tunnel testing required by the Concorde’. It also helped the company ‘quickly run 53 million compute hours on Amazon Web Services (AWS) with plans to scale to more than 100 million compute hours’.

It has become clear that cloud services are fundamental in accelerating the success of many R&D projects globally, and limited access to them can ultimately lead to the hindrance of a projects’ success. Deloitte Insights, a business insights provider speaks of the substantial technological infrastructure often required to deliver R&D projects and the costs that come with it, tying many companies down, thus ‘missing out on optimising their cloud and data strategies to enable innovation and R&D.’

In the government’s 2021 Autumn budget, they recognised the potential of cloud and its magnitude in supporting UK innovation and believe that this recognition will be instrumental in ensuring the UK remains competitive internationally, as several other nations have also implemented R&D tax relief for cloud services.

The Specifics

While computation, data processing and software costs used directly for R&D projects will be eligible for tax relief, companies such as Tech UK called for storage costs to be added to the budget last Autumn. Tech UK justified this advice by asserting that in many projects ‘80% of costs can be attributed to the storage of data.’

With the governments initial plan to exclude the eligibility of storage costs, some complications were also forewarned in the complexities of categorising specific activity and use of services, and compartmentalising what will and won’t be eligible for relief. Amazon Web Services is a cloud provider that is often used for R&D activity. It provides a variety of services from Computation, Blockchain, Storage and more. However, many of these categories are intertwined. AWS Lambda is a code running service provided by Amazon, of which costs attributed to this would generally be categorised under “computation” within the new government parameters for R&D tax relief. Conversely, Amazon determines the cost for this by the “amount of memory you allocate to your function” and may therefore be categorised within the parameters of “storage”. You can see here how this may give rise to confusion when businesses are distinguishing what they are allowed to claim for.

This issue has been an ongoing consideration of the Treasury, and their decision in Autumn was based on maintaining the principle from previous schemes, that any costs attributed to storage will be considered as general overheads and will therefore not be eligible. However, the Treasury have evidently heeded the voices and responses of companies across the UK since this announcement and have therefore instated all cloud costs contributing to R&D as qualifying expenditure in the Spring 2022 budget. This now includes costs of storage, with a pledge to support ‘data-heavy research’. The Treasury’s intention to adapt to the changing demands of modern UK innovation is undoubtedly a primary focus during these unprecedented times.

Our View

Counting King welcome the introduction of cloud costs being eligible for R&D Tax relief, as this will provide an increase the amount of companies that can claim across the UK. Let us help you get the support from the government you deserve. We understand the complexities of all the eligibility criteria and can complete your claim accurately, getting you the best benefit available. Our specialist team help. Call us today on 0161 667 5069, or email us at info@countingking.co.uk.

Industry News & R&D Tax Credits

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