Businesses of all shapes and sizes are using blockchain technology for various applications. Much of the baseline technology is easily accessible, with an abundance of knowledge out there in the public domain. So, where is the qualifying R&D in blockchain? What are those genuinely novel applications? And, when it comes to claiming R&D for your blockchain innovation, what actually qualifies?
In this article, we’ll explore where the true innovation lies, answering these questions and more. We’ll also look at the planned changes to the R&D incentives and the impact this will have on blockchain tax relief.
R&D tax relief and blockchain
Blockchain is an increasingly broad and popular area of technology, full of buzz talk and hyperbole around NFTs, the latest cryptocurrency and Web3. When it comes to R&D tax relief, there’s no time for hype. HMRC’s dedicated team of software specialists need to hear you justify exactly what is technologically unknown and novel about your blockchain work, and the precise nature of the advances you seek.
Whether you’re a software business using blockchain or a blockchain company, you need to demonstrate what is true innovation and fully understand any element of the engineering is routine.
Most people make apps or services to simply use blockchain technology, using readily available baseline technology and knowledge. If you’re not creating your own underlying blockchain and are merely using an existing framework, it’s likely that this will fall outside of qualifying R&D. Although your work may be bespoke, you’re essentially building on top of an existing technology.
So where is blockchain R&D for tax purposes happening?
Qualifying R&D is found in projects where you’re creating your own blockchain, with entirely new technical stacks, or extending the blockchain in some way. It may be that you need to get different blockchains to interact with each other and work together. If you’re investigating workarounds to get blockchain to work for your purposes, then there’s every chance you have had to carry out qualifying R&D.
Other areas of R&D can be found in tackling some of the issues with blockchain head on, such as those around the environmental costs of mining, security, GDPR compliance and data governance. Taking the GDPR example, the blockchain is immutable so essentially personal details are held forever. Some businesses are looking at ways of supplementing the blockchain with separate databases that can allow people to manage their records, even historically delete personal details, in a way that can still be verified to the blockchain but remain GDPR compliant.
The environmental impact of data mining is one of concern. A large number of consensus mechanisms used by blockchains to validate blocks, such as Proof of Work, require masses of energy and this will be having a detrimental impact on the environment. If you’re working on ways to use blockchain in a more environmentally friendly way then there’s a good chance of your project work qualifying for R&D tax relief.
Many novel uses of blockchain are likely to be complicated and littered with serious technical challenges, meaning that often significant costs are involved. When you’re coding the blockchain, you need experienced developers and computing resources to support you. As powerful incentives, you want to make sure you capture all costs to fund your ongoing innovation and further growth. ForrestBrown are here to help you do just that.
One ForrestBrown client is using blockchain technology to help brands and consumers tackle counterfeit goods in the second-hand luxury goods market by indexing and certifying products.
The Blockchain and R&D tax reliefs consultation: data and cloud costs, and pure maths
Off the back of the R&D tax reliefs consultation, the chancellor has outlined changes to the R&D incentives in 2023 that will impact blockchain R&D claims, perhaps significantly. From April 2023, the government is extending the scope of qualifying expenditure to include cloud computing and data storage costs, as well extending the definition of R&D to include pure mathematics. If you’re yet to claim R&D for your blockchain innovation, then now is a good time to do so. Capturing these costs for future claims could make a significant difference to the overall value. Let’s look at these changes in more detail and the potential impact on an R&D claim:
Data and cloud computing costs in blockchain
R&D tax relief has not previously been available on the cost of data and cloud computing services. At ForrestBrown, we’ve welcomed the government’s decision to extend the definition of qualifying expenditure to include these costs.
Cloud computing is ubiquitous – everything from virtual servers to development to on-demand computing power or data processing – and costs are often high with companies working with blockchain technology. Some of these cloud costs will be essential to the R&D you’re carrying out. If you’re making new tech then your cloud costs are likely to be significant and worth including in your claim when the changes come in.
There are still some questions around how cloud costs should be apportioned. We may not have formal guidance from HMRC ahead of the new rules and each case will need to be considered in the context of the company’s R&D projects. But our team of software specialists has been closely involved in the consultation on this change and has substantial hands-on industry experience, which means we are exceptionally well placed to help establish a robust approach.
Pure maths and blockchain
The chancellor has also confirmed that advances in pure mathematics will come within the scope of R&D tax relief from April 2023. Some blockchain applications and projects are driven by underlying mathematical advances. Blockchain is in fact a fine example of pure maths, as it incorporates cryptography at its core. It’s important to start thinking about the mathematical science aspects of your projects so that you are best placed to capture any additional costs when the change comes in.
Overseas R&D changes and blockchain
The regime changes are not all positive for those working with blockchain technology. The government is planning to withdraw relief for certain R&D activities undertaken outside of the UK. As with a number of software companies, it is common for those working with blockchain to outsource or nearshore developer work. Currently, R&D tax relief can typically be claimed for this overseas work, but perhaps not for much longer.
Expenditure on externally provided workers and subcontractors is due to be excluded from R&D tax relief if activities are carried out overseas. The chancellor has listened to representations, including those from ForrestBrown, and we are expecting some protections to be added to this measure, where it is necessary for activities to take place outside of the UK. Our team will be following updates on this point closely, but we’d advise any companies potentially affected to ensure they are kept informed on this evolving area.
How ForrestBrown can support blockchain R&D
At ForrestBrown, we can work with you in a way that is tailored to your needs. Our experience in software R&D claims, and blockchain in particular, means that we understand the technology, what actually qualifies as R&D in blockchain and how to apportion expenditure correctly in a changing landscape.
We can deliver full end-to-end claims like we do for many software clients, or an advisory service which meets your specific needs: this can cover enquiry support, ad-hoc sector specialist insight, or consultancy on any aspect that would benefit from our technical firepower and expertise. Here’s an overview of what we can offer you:
R&D tax consultancy for blockchain businesses:
- Review the robustness of R&D claims and highlight areas of risk.
- Verify that R&D projects claimed meet the R&D guideline criteria and review the methodology for apportioning expenditure.
- Identify any areas of the claim that could be subject to challenge by HMRC during an enquiry.
R&D enquiry support for blockchain:
- A full and thorough review of all claim documentation and HMRC correspondence to date.
- Handling all aspects of your enquiry, managing timelines and liaising with HMRC on your behalf.
- Developing and delivering a strategy that meets your business priorities, balancing protecting the value of your claim with achieving a resolution as quickly as possible.
Find out more about our R&D enquiry support service or read more on the increased risk of enquiries in software R&D claims.
Example of a positive outcome of a blockchain R&D enquiry
A company working with blockchain technologies approached us, as two of their externally prepared R&D claims were under enquiry. HMRC had challenged the eligibility of the R&D projects described because they weren’t clear whether overall advances in technology had been sought (e.g. whether R&D had been carried out). Our software sector specialist spoke directly to the competent professionals to gain an understanding of the R&D. We then presented it to HMRC and were able to reassure HMRC that two of the three projects did involve qualifying R&D. As a result, one of the two claims was accepted in full and the other was subject to a modest reduction in value.
R&D tax relief end-to-end claims:
- We bring together the best team for your needs – including software experts, chartered tax advisers, accountants, lawyers, and former HMRC inspectors – to prepare your claim and analyse your costs. With HMRC scrutiny into software claims at an all-time high, our in-house Quality Assurance is there to further mitigate the risk of an enquiry into your blockchain claim.
Ad-hoc sector specialist insight:
- Access to our expert team of sector specialists – utilising industry experience across the entire software ecosphere including big data, blockchain, AI, and databases, our specialists offer next level insight into your R&D
- Our software team is led by Tom Heslin who was part of the HMRC-led committee that drafted HMRC’s updated guidance on software R&D.
If you’re working with blockchain, there is no better time to prioritise and engage fully with your R&D tax claim. It’s important to ensure that you understand what you’re claiming for, that it is genuinely innovative by HMRC’s standards and that costs are correctly apportioned. This stands you in good stead should an enquiry be raised. With the changes to the incentives due in April 2023, it’s also a fantastic time to re-look at how you track your projects and record time.
ForrestBrown will assemble the best team to deliver bespoke support where you need it, from end-to-end claims to bespoke consultancy. We’re passionate about R&D tax relief and work closely with our software clients. We’ll take the time to understand your business ambitions and provide informed advice that will make a genuine impact.
Accountants: Are your clients innovating in blockchain?
ForrestBrown work with accountants in different ways to provide specialist support and strengthen your client’s R&D claims, and ultimately your relationship. If you’re seeking support in claiming blockchain for your clients then our team is market-leading with sector specialist insight and experience you won’t find elsewhere. We’re always open and transparent, and happy to assist on an on-going or ad-hoc basis that works for you and your clients.
Aisha Perrott AAT CTA, R&D tax specialist, Old Mill
It’s nice to talk to ForrestBrown as if you’re our colleagues. I speak to staff at ForrestBrown quite frequently and you guys feel a part of my team […] Overall, every client I’ve referred has loved ForrestBrown’s way of working. It’s a great addition to Old Mill’s client service.
What does the best R&D tax advice for your business look like? ForrestBrown will customise our service to match your specific requirements. Whether that’s handling your entire claim or supporting you with specific software expertise on a consultancy basis. Get in touch with our team today >