To get to the full answer you need to have an understanding of how the schemes are designed.
For an expense to be eligible for the R&D schemes, it needs to meet the criteria for one of the schemes’ ‘cost buckets’. It also needs to be revenue expenditure (i.e. classed as day-to-day operating costs). If the costs don’t fit into one of these categories, then they aren’t eligible.
There are also different rules for what can be included under the R&D Tax Credit/Relief and RDEC schemes.
The cost buckets include:
Hosting or cloud-computing costs such as AWS do not meet the requirements of any of the cost buckets specifically. However, these costs are typically composed of a wide range of services, and depending on how the company utilises these products, some of them may be eligible under the “Software” category. This is dependent on the company, the services and how they are being utilised. The details of these costs needs to be examined fully to determine the eligibility of the cost for the R&D tax schemes. Storage, telecom and data costs do not fit in any of these cost buckets so they are not eligible.
If you can determine that some of these cloud-computing or hosting costs are being utilised as software then you will need to apportion them between eligible and ineligible R&D activities. The best method and approach to doing this will depend on the company’s individual circumstances.
In order to provide more clarity, the government confirmed in Budget 2020 that they will be launching a consultation on hosting and cloud-computing costs (in which MMP will participate) and will be releasing further guidance on this after the consultation period.
In the meantime, this is a risky and complex area. If you make a claim for ineligible expenses or activities, then there is a real risk of a protracted HMRC enquiry. Detailed advice should be sought. Determining if your costs are eligible for R&D tax schemes can be a minefield.
We’ve heard companies say: “But I claimed all of my hosting costs previously and my claim was approved by HMRC”. Unfortunately, your claim was not actually “approved”. If you included an ineligible cost or activity, and subsequently received a tax credit/relief this means HMRC did not review the claim in detail and the problem was not identified at the time.
Even on previously paid out claims, HMRC has the ability to go back four years to review these, if they discover something is incorrect, and can go back up to 20 years if there is dishonesty. They can claw back the R&D tax credit payments and also issue penalties of up to 100% of the amount claimed.
If your advisor is telling you that all your hosting/cloud computing costs are eligible then they are wrong. This is a risky and complex area, hence HMRC’s consultation on this.
Regarding the video game tax relief (VGTR), this is more straightforward. Costs incurred within the European Economic Area (EEA) on a qualifying game’s ‘core’ activities are eligible for the scheme. The attribution of costs between stages of development must be done on a just and reasonable basis. So in many cases, an apportionment of the hosting costs, cloud-computing and/or data costs would be eligible for inclusion within the VGTR. More detail is available from HMRC .
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