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How accountants can help clients leverage AI and maximise R&D Tax Relief opportunities

17 Oct 2024

Written by RandD

As the pace of artificial intelligence (AI) innovation continues to accelerate, businesses across the UK are looking to harness the benefits of AI to improve their operations.

Accountants are uniquely positioned to assist their clients in securing valuable R&D tax relief to fund these cutting-edge projects, such as AI.

At randd UK, we are helping accountants explore how their clients can claim R&D tax relief for AI innovations.

AI: Transforming major industries

AI is no longer a futuristic concept confined to the tech giants – it is reshaping industries like healthcare, finance, and transportation.

Healthcare providers are using AI for medical imaging, disease prediction, and personalised treatments.

In finance, AI powers fraud detection, algorithmic trading, and automated customer service, while in transportation, companies are developing AI technologies for autonomous vehicles.

For businesses across these and other sectors, investing in AI projects is becoming essential for staying competitive.

However, the high costs associated with AI, such as cloud computing resources and data acquisition, can be a significant barrier to growth.

This is where R&D tax relief comes into play, offering financial incentives that can make AI investments more accessible.

Understanding R&D tax relief in AI

The UK has recognised AI as a critical technology, with its 2021 National AI Strategy and the Science and Technology Framework 2023 emphasising the importance of AI for the future economy.

To encourage businesses to invest in AI and other technological innovations, the former Government enhanced the R&D tax relief scheme, offering financial support to companies engaging in research and development.

For accounting periods starting on or after 1 April 2023, companies can claim R&D tax relief on cloud hosting costs and data licences – two key expenditures for businesses developing AI projects.

These changes recognise the significant role that cloud computing and large datasets play in AI development, offering a lifeline to businesses struggling with the financial demands of scaling AI projects.

Accountant looks at AI and R&D relief

What are the challenges?

Despite the Government’s commitment to support AI, HM Revenue & Customs (HMRC) has been quick to challenge R&D tax claims related to this innovative technology.

In a landmark First Tier Tribunal (FTT) case involving Get Onboard Ltd. (GOL), a software company that developed an AI system for client verification, a new precedent has been set for R&D claims related to AI and machine learning (ML).

The case challenges HMRC’s interpretation of R&D activities under the BEIS guidelines, providing several important insights for accountants and their clients.

Shifting the burden of proof

The tribunal ruled that once a company provides sufficient evidence of a technological advance, the burden of proof shifts to HMRC to refute the claim.

Previously, many companies, especially SMEs, struggled with HMRC’s template responses rejecting claims based on minimal evidence, often citing simplistic Google searches.

This ruling is significant as it prevents HMRC from dismissing valid claims without proper justification, ensuring fairer treatment for claimants in the AI sector.

Expanding the definition of a competent professional

Another key finding was the tribunal’s recognition that a “competent professional” does not necessarily require formal qualifications in the field of the project.

The GOL case demonstrated that technical expertise and relevant experience were sufficient to meet this standard.

This is crucial for many AI and ML projects, where innovation often comes from individuals with practical, hands-on expertise rather than traditional academic credentials.

Accountants may now be able to advise clients that they may still qualify for R&D tax relief even if their AI projects are led by non-formally trained experts, as long as those individuals possess demonstrable expertise.

Group of accountants discuss R&D relief

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Use of existing technology does not disqualify R&D tax relief

The tribunal also clarified that using existing technologies, such as open-source code or established AI algorithms, does not automatically disqualify a project from R&D relief.

In the GOL case, HMRC had argued that using pre-existing processes meant no real advance had been made.

However, the tribunal emphasised that applying existing technologies in a novel way to solve a new problem could still qualify as an R&D activity.

This finding is particularly relevant for AI projects, where many advancements build on existing frameworks but push the boundaries of what is possible.

How Accountants Can Support Clients with AI Projects

Accountants are often the first point of contact for businesses exploring AI investments.

By understanding the scope of R&D tax relief and how it applies to AI projects, accountants can add real value to their clients.

Here’s how you can help:

  • Identify qualifying projects: Many businesses may not realise that their AI investments qualify for R&D tax relief.

AI projects that seek to resolve technological or scientific uncertainties, such as developing a new AI model or improving existing systems, could be eligible. Your role is to help clients identify which aspects of their AI projects qualify for relief.

  • Guide clients on eligible costs: With the inclusion of cloud hosting and data licensing costs, accountants should ensure their clients are aware of what expenses can be claimed.

Cloud computing provides the computational power needed for AI tasks, and data licences allow companies to access the vast amounts of training data needed for AI model development. By helping clients document these costs, you can maximise their claims.

Accountant researches AI and tax relief opportunities
  • Advise on new legislation: Recent changes have also extended R&D tax relief to advances in pure mathematics, an area critical to AI development.

Accountants can guide clients working on AI projects that rely on mathematical models, algorithms, and statistical methods, ensuring that these activities are included in their R&D claims.

  • Assist with HMRC Enquiries: As AI and machine learning projects become more common, so too do HMRC enquiries into the validity of R&D claims, as the example above shows.

By staying informed about tribunal rulings and HMRC guidance, accountants can better prepare clients for any potential enquiries and ensure they have the necessary evidence to support their claims.

If you aren’t capable of supporting clients with their claims, then firms shouldn’t shy away from calling on outside help.

At randd UK, we are already working with a wide range of accountants to help them process claims related to AI and other cutting-edge technologies.

We have a deep understanding of the claims process, including the often-complex ins and outs of claims qualification and expenditure.

Accountant looks at artificial intelligence

Maximising the opportunity for clients

AI offers businesses immense opportunities for growth and innovation, but it also comes with significant financial challenges.

By leveraging R&D tax relief, businesses can offset some of the costs associated with AI development, making it easier to invest in these cutting-edge technologies.

As accountants, your knowledge of the R&D tax relief scheme can be invaluable in helping clients access this funding.

Whether it’s guiding them through the complexities of the claims process, identifying qualifying projects, or advising on the latest legislative changes, your support can make a substantial difference.

Partnering with an experienced R&D tax advisory consultancy like randd UK can further enhance your ability to secure the best possible outcomes for your clients.