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Does research and development in AI qualify for tax relief?

Author: Tom Mason

The world has been taken by storm by the developments in AI in the last two years. The buzz around this fast-growing technology is evident across many different industries.

According to GOV.UK, the AI industry already supports over 50,000 jobs in the UK and annually adds more than £3.7 billion to the economy.

These numbers are projected to grow considerably and by 2035 the Government predicts that the UK’s AI market could exceed $1 trillion.

Given the interest and potential lucrative opportunities in AI, it is not surprising that many businesses are pursuing exciting innovations in this area and asking how the existing R&D tax relief rules apply.

Understanding the different approaches to AI

As an accountant specialising in R&D tax credits, it’s crucial that you understand how the dynamic field of AI technology impacts eligibility for these incentives.

Advancements in AI open significant opportunities for businesses to secure R&D tax credits, where they can demonstrate that AI projects tackle specific technological uncertainties or challenges.

The scope for claiming R&D tax credits is not limited to general AI and NLP, such as we have seen with the evolution of ChatGPT and Microsoft’s CoPilot.

More advanced technologies such as Artificial General Intelligence and Brain-Machine Interfaces are paving the way towards more sophisticated, human-like AI systems that seamlessly integrate with human cognitive processes, sometimes directly with the brain.

These cutting-edge fields present unique challenges and advantages that could lead to substantial advancements in technology, many of which may meet the eligibility requirements for tax relief.

AI eligibility for R&D tax relief

Just because you undertake innovative R&D work in AI, or even with the support of AI, it doesn’t mean that you are automatically eligible for tax credits or relief.

Meeting the eligibility for R&D tax credits requires all claimants to show how a project has resolved technological uncertainties.

For AI, this can sometimes be an easy element to demonstrate, but equally, as it is a new field new solutions and methodologies continue to be defined and redefined.

For example, more advanced machine learning, which demonstrates the ability to interpret data or even emotions in a more human-like manner could fulfil this requirement, whereas new solutions built on existing Large Language Models (LLMs) like ChatGPT may not meet these criteria.

As previously highlighted in our recent blogs, a key part of the claims process is demonstrating the involvement of competent professionals.

Typically, this would mean someone with extensive experience, particularly relevant and high-level accreditations or degrees or someone who is generally recognised for their contributions to the field.

The pool of potentially competent professionals in AI – as defined by the points above – is smaller than in some other areas, due to its relevant infancy. However, this is rapidly changing every year as more and more experts enter the sector.

Where might claims for R&D tax relief go wrong?

Contrary to common belief, R&D tax credits are not confined to entirely novel inventions. Significant improvements or adaptations in both established and emerging AI technologies can qualify if they effectively tackle specific technological challenges.

This area of tax eligibility can often be confusing, highlighting the importance of consulting with an R&D tax specialist who can help assess and qualify your project accurately.

Moreover, maintaining meticulous documentation of your R&D activities is crucial. This should include a detailed account of the experiments conducted, the specific challenges encountered, and the methodologies employed to overcome these challenges.

Comprehensive and accurate documentation not only supports your claim but also substantiates the innovative nature of your AI projects, which is essential for securing R&D tax credits.

Getting to grips with R&D tax claims

The evolution of AI is exciting, but we appreciate that as a new field, there is some uncertainty relating to R&D tax claims for projects that are developing or utilising AI.

With an extensive background supporting firms working with technology companies to secure R&D tax relief, we can help you make sense of the rules and how they apply to AI.

For tailored guidance, please contact a member of our advisory team today to discuss how we can help you.