Cloud and software costs

Cloud computing, hosting, data and software licences are now a routine part of technical work and a growing share of its cost. They sit awkwardly in schemes whose cost categories were written around people, materials and contractors, and only some schemes have added a category for them. The same invoice can be a named eligible category in one country, an apportioned overhead in another, an item earning only the base deduction in a third, and a capital item outside the claim altogether.

The method that holds everywhere is to identify what each cost is, decide whether the scheme treats it as consumed in the work, as overhead or as capital, apportion between the eligible work and ordinary use on a measured basis, and keep the evidence.

What this guide covers

• The cost types: cloud computing, hosting, data, software licences, development tools and computer rental.
• Consumed in the work, overhead or capital.
• Apportioning between the eligible work and ordinary use.
• Tools bought in against software built in-house.
• Country differences in the schemes' own wording.

The cost types

Group the IT cost centre into these types before asking any scheme question; each raises its own question and needs its own evidence.

Consumed in the work, overhead or capital

Every scheme sorts these costs into one of three bins, and the bins carry different values. The first is cost consumed in the work, which most schemes value in full for the apportioned share; the United Kingdom wording, for example, places data licences and cloud computing here. The second is overhead, which the schemes variously exclude, apportion, replace with a proxy or value at the base deduction only. Where a scheme has no named category for cloud or software, this is usually where the cost lands. The third is capital: a server bought outright, a perpetual licence capitalised in the accounts and hardware on the fixed asset register are outside the main claim in most schemes and are dealt with, if at all, through depreciation, a decline in value or a separate allowance.

The accounting treatment is the first signal, not the answer, because the schemes define the bins in their own words. A subscription expensed monthly may still be overhead in a scheme that values overhead at less, and a licence capitalised under an accounting policy may still be a cost the scheme recognises. Test each type against the country wording, record the bin it falls into, and apply the scheme's percentage or exclusion as a separate step after the apportionment.

Apportioning between the eligible work and ordinary use

Cloud and software costs almost always serve both the eligible work and the ordinary business, so the figure claimed is a share, and the share has to be measured rather than asserted. Three methods, from strongest to weakest.

Metered usage

Cloud platforms meter everything. Tag resources by project code at creation, run the experimental environment in its own account where the platform allows, and export the billing data each month. The share of compute hours, storage volume or API calls attributable to the eligible project codes is then a fact in a file, not an estimate.

Environment separation

Where tagging was not set up, separate environments often were. The whole cost of an environment used only for the eligible work can be claimed on the strength of the environment inventory, and production hosting is excluded in full. The shared layer, such as storage or networking, still needs a measured split.

Seats and time

Licences priced per user are apportioned by multiplying each user's licence cost by that user's apportioned share of time on the eligible work, the same share used for their staff cost. A licence apportioned at 70 percent for a person whose timesheets show 40 percent is a contradiction a reviewer will find.

What goes wrong: production hosting claimed because the product was once developed; the whole cloud bill claimed because the company considers itself a technology business; licences claimed for people excluded from the staff figure; and shares that differ between the staff schedule and the IT schedule with no explanation. The cure is the same in each case: a measured basis, written down, consistent with the rest of the claim.

Tools bought in against software built in-house

Where the technical work is itself the development of software, the cost of the people doing it is a staff cost; this guide covers the tools and services they use, not their time. Whether a software project qualifies at all is an eligibility question, and several schemes answer it with exclusions for software developed for the internal administration of the business. Those rules are on the eligibility pages and in the qualifying versus non-qualifying activities guide; the United States has a page on internal use software. A tool bought to build software that does not qualify is not an eligible cost however it is apportioned.

Illustrative example

Illustrative example. Larkfield Analytics Ltd, a hypothetical company, spends 120,000 a year on cloud services and 35,000 on licences, and buys a 50,000 server. Its billing export shows 36,000 for a training environment tagged to the eligible project and used for nothing else, taken in full; 24,000 of shared storage, apportioned at 40 percent by volume attributed to the project's tags, or 9,600; and 60,000 of production hosting, excluded. A simulation licence of 20,000 covers four engineers whose timesheets show 60 percent on the eligible work, giving 12,000. A dataset licence of 15,000 was used only for the project and gives no right to sell or share the data, so 15,000 is a candidate where the scheme recognises data licences. The server goes to the fixed asset register and out of the cost schedule. The candidate figure before scheme rules is 72,600. In the United Kingdom, where data licences and cloud computing services qualify, the merged scheme gives a 20% expenditure credit on qualifying expenditure, taxable, so a gross credit of 14,520 before the tax on it (United Kingdom: eligible expenditure). In Singapore the same costs are other R&D expenditure, including software, which qualifies for the base 100 percent deduction but not for the additional deductions (Singapore: enhanced deductions). Elsewhere the figure is sorted into the scheme's own categories and the benefit is calculated at that country's rate.

Country differences

Where a scheme names no category for cloud or software, the row says so and the linked page lists the categories it recognises.

Related pages

• Module 2: Cost capture
• Module 3: Staff time apportionment
• United Kingdom: eligible expenditure
• United States: qualified research expenses
• Singapore: enhanced deductions

Educational material, not advice. Eligibility and treatment depend on the scheme and the facts.