R&D Tax Relief on blockchain technology

TaxTalk - July 2023

read timeRead time: 19 mins

Blockchain technology is an area in which there is constant innovation and improvement in the baseline technology, and is therefore an area where the availability of R&D tax relief should be strongly considered.

Blockchain technology has disrupted the way data is controlled. Today, companies large and small are utilising and investing significantly in the development of their blockchain technology. But blockchain technology is an ever-evolving area requiring constant investment: from the development of new software platforms that utilise blockchain-based technologies to the re-engineering of existing software to make use of, and integrate with cutting-edge blockchain solutions.  As a result, it is an area which can fall squarely within the criteria for R&D tax relief.  However, in order to claim R&D tax relief, companies will need to be able to convey the innovation, development and technological advances to HMRC.

Not all developments may qualify

Currently many companies are developing apps or services to integrate with their technology. In some instances, they will be using publicly available baseline knowledge and technology.  Because the company is not developing its own blockchains, but is using an existing framework, it may find that R&D tax relief is not available, as there may well not be a demonstrable advance in science, or technology when solely building upon the original baseline technology.

What areas qualify for relief?

Qualifying R&D expenditure is more likely to be available where a company is developing its own blockchain, with entirely new technical stacks, or extending a blockchain. Companies researching alternative routes to enable a blockchain to function for their purposes, may therefore be able to claim R&D tax relief.

Additionally, efforts to solve some of the headline concerns surrounding blockchains will usually qualify as R&D expenditure, including:-

  • Security;
  • Environmental costs of mining;
  • GDPR compliance; and
  • Data governance.

A hot topic: the environmental impact of data mining, is an area under scrutiny, particularly the significant energy required for data mining. Should a company be researching and developing methods to use blockchain in a more efficient, environmentally conscious, way then there is every chance that the work could qualify for R&D tax relief.

Qualifying R&D expenditure changes

There have been substantial changes to the scope of expenditure that may be included in an R&D tax relief claim for both large companies and SMEs for accounting periods beginning on or after 1 April, 2023. These include:

  • Data licences;
  • Cloud computing; and
  • Pure mathematics.

Cloud computing costs are often substantial when developing blockchain technology and the inclusion of them as qualifying R&D expenditure will be welcomed. As will be the inclusion of pure mathematics, as some blockchain applications and projects are driven by underlying mathematical advances.

First-Time Claimants

If your company is making a R&D tax relief claim for the first time, you will need to notify HMRC in advance about your claim using the new claim Notification Form. The form is required for accounting periods beginning on or after 1 April 2023.

You must notify HMRC if:

  • You are claiming for the first time;
  • You are claiming for the previous tax year, but you did not submit that claim until after the last date of the claim notification period. (The claim notification period ends 6 months after the end of the period of account); or
  • Your last claim was made more than three years before the last date of the claim.

Existing Claimants: The Additional Information Form

From 1 August, 2023, you will need to submit an additional information form to HMRC to support all your claims for R&D tax relief or expenditure credit. This form needs to be submitted before you submit your company’s Corporation Tax Return. Failure to do so may result in your claim for R&D tax relief being removed from you Company Tax Return.

However, we at PKF are well prepared for the additional reporting requirements, and all the information required for the additional information form will be captured during our work when we prepare your R&D claim.