Coronavirus Support Packages and Research & Development (R&D) Tax Relief
During these uncertain times, you may have taken advantage of the range of supporting financial packages introduced by the UK Government. Whilst these packages are likely to offer extremely important cash injections to your business, it is important to consider the impact that such funding could have on your R&D tax relief or tax credit claims – past, present and future.
Background to grant funding and R&D tax relief/credit claims
There are two R&D tax related schemes:
- SME scheme – Potential benefit of 24.70p tax relief (excluding the general corporation tax relief) for every £1 of qualifying expenditure.
- Research and Development Expenditure Credit (“RDEC”) – Potential benefit of 10.53p (excluding the general corporation tax relief) for every £1 of qualifying expenditure.
The receipt of a subsidy impacts upon any benefit you receive under the SME R&D scheme. The extent of that impact depends on whether the subsidy is classed as Notified State Aid or not. For example, if you receive Notified State Aid for a qualifying R&D project then you cannot claim SME R&D relief for any of the qualifying expenditure incurred on that project, even if it is only funding a proportion of the costs. Relief may still be available under the RDEC scheme but, as noted above, the benefit under that scheme is not as generous.
Where the funding you receive is not classed as Notified State Aid, then you may still be able to make an SME R&D claim in respect of the unfunded element of expenditure. An RDEC claim may then be available in respect of the funded element.
Potential Retrospective Effect
As noted above, if you receive Notified State Aid for a project (irrespective of the amount or timing of that receipt), no SME R&D relief can be claimed on any of the costs associated with that project. Accordingly if you have claimed one of the grants currently available and it is Notified State Aid then you need to make sure that this in turn isn’t going to result in you having to repay SME R&D relief you have already claimed. This is particularly relevant for ongoing projects which you have already claimed R&D SME relief for.
Coronavirus funding and R&D tax relief/credit claims – What impact will the UK Government’s funding packages have?
The most widely taken up Coronavirus funding options are the Coronavirus Job Retention Scheme (CJRS) and Coronavirus Business Interruption Loans (CBILS). Other options available to help with cashflow throughout the Coronavirus pandemic are Bounce back Loans, VAT Deferral and Time to Pay arrangements.
HMRC have indicated that where the funding is received for general business support rather than being project specific, they would not consider the funding to relate to specific R&D activities and therefore the funding would be unlikely to prevent the company from being able to access SME R&D relief. Each claim however will depend on the individual facts and where the funding can be linked to project expenditure (for example where the costs of a project have been identified within a funding application as costs that require subsidising), we would anticipate that the Notified State Aid funding restriction will apply.
Coronavirus Job Retention Scheme (CJRS)
The support measure allows companies to furlough employees and to claim 80% of the employee’s salary up to a maximum value of £2,500 a month. This will not be classified as Notified State Aid and will therefore not affect the version of the scheme that the company can claim under (SME or RDEC) but if the salary is subsidised then companies can’t claim subsidised R&D. Where those employees that usually carry out R&D activities are furloughed then the period of time for which they are furloughed and the subsidised salary will not be claimable for R&D purposes. However, HMRC have indicated that should the employees salary not be subsidised by the government but they are in fact working a reduced working week as part of a lockdown strategy then this will still be claimable as part of any R&D claim.
Coronavirus Business Interruption Loans (CBILS)
The Interruption loan was introduced to help companies through the worst effects of the coronavirus pandemic. Currently the Government has notified CBILS as a State aid under the European Commission’s new Temporary Framework for COVID-19 and thus this will affect any R&D claim submitted for companies that have received an interruption loan. If the CBILS relates specifically to the company’s R&D expenditure (on a project) rather than being intended more generally to support the company then those projects funded using a CBIL will not qualify under the SME version of the relief and will instead will form part of the less generous RDEC relief.
Where a CBIL is received and utilised for multiple projects (or possibly only one) then those projects funded by a CBIL will fall under the RDEC version of the relief but all other projects may fall under the SME version of the relief. Because of this we would strongly advise that you seek help if your business submits R&D claims and has received a CBIL.
Business Rates Relief
Rates are not a qualifying cost within the R&D legislation and can’t be claimed under either version of the relief. As such applying for the rates relief will have no impact in any future R&D claims.
Bounce back Loan Scheme (BBLS)
The scheme helps small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available for a company is £50,000. BBLS, like CBILS, is classed as Notified State Aid and will therefore affect a company’s R&D claim. However the big difference between CBILS and BBLS is the Bounce Back loan is significantly smaller (max of £50,000) and therefore will likely be classed as “De minimis” state aid. A company can’t claim SME R&D relief for projects funded by de minimis state aid, but where the funding is utilised for any other projects (non R&D) or general day to day business this will have no impact on any future claim.
VAT Deferral and time to pay arrangements
Where companies have taken advantage of the deferral options for tax payments or agreed a time to pay arrangement then this should have no impact on any R&D claim provided that the terms of the agreement are adhered to. Any R&D claims submitted where the claimant has arrears with HMRC, RDEC or payable tax credit will not be set against any of those amounts before the revise due date.
Where tax has been deferred as part of a Time to Pay (TTP) arrangement, HMRC will follow existing policy and set any R&D tax credit off against any TTP liability, not just the amount owing at the point in time the credit is paid. This would include informal deferrals offered in advance of TTP arrangements being put in place. TTP is an agreement by HMRC to delay enforcement proceedings for a given debt to a specified future date. It doesn’t alter the fact that the debt is owed to HMRC or change the due date.
Finally, where companies have missed filing deadlines due to the impact of Coronavirus then HMRC may accept late claims. While HMRC have yet to give clear indication if this is the case, previously where a company was able to provide a legitimate and compelling case for a late filing of a CT Return, HMRC would allow a late R&D claim. At this current time it seems Coronavirus would be seen as such but unless there is clear guidance from HMRC to ensure this is the case we would advise ensuring any claims are still submitted by the regular filing date.
What steps should the company take next?
The funding packages introduced by the UK Government will be vital to many companies however, please take care to consider whether the above restrictions are likely to have a detrimental effect on your R&D SME claims as, once the funding has been received, it cannot be repaid.
If you have any questions or would like to discuss the impact of Coronavirus on your business, please get in touch.
The information in this update should not be regarded as financial advice. This is based on our understanding on 11 June 2020. Laws and tax rules may change in the future.