How Will Coronavirus Government Support Affect Your R&D Tax Credit Claim?
The government has provided the following support measures for companies affected by the COVID-19. Here are a few of the Schemes we have commented on:
- Coronavirus Job Retention Scheme (CJRS)
- Job Support Scheme (JSS)
- Coronavirus Business Interruption Loan Scheme (CBILS)
- Bounce Back Loans
Coronavirus Job Retention Scheme (CJRS)
This government support only applies to the SME Scheme. It is interesting to note that technically the CJRS is not Notified State Aid, so s1138(1)(a) does not apply.
Under the CJRS support, the employee is to cease all work in relation to their employment. From 1 July 2020, it has been possible to be a flexibly furloughed employee, which allows businesses to bring back employees part-time, but requires the employee to do no work in relation to their employment during a CJRS claim period.
Furloughed staff are permitted to undertake study and training. As the furloughed employees have ceased all work during the CJRS claim period, HMRC will consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means any support received does not affect an R&D claim that otherwise could be made. In other words, the CJRS funding received is in respect of employees who could not work on an R&D project and therefore should not affect any R&D project and costs that were ongoing at the time.
If there were employees who were furloughed and where no CJRS payments were received, HMRC will consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development, and again there is no effect on a R&D tax credit claim that can otherwise be made.
Where employees are paid holiday pay and sick pay, claimants may apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to work time. HMRC considers that any period during furlough which is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation. However, because the staffing costs incurred on leave and sickness during furlough are subsidised through CJRS payments, this will prevent this element of the staffing cost from qualifying where a company is making a claim in the SME scheme. The company would however be able to include these staffing costs in a claim for RDEC. HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.
Job Support Scheme (JSS)
It was announced in September 2020 that a Job Support Scheme (JSS) would go live in November 2020, following the planned end of the Coronavirus Job Retention Scheme. It was expanded shortly after launch to include further support for businesses forced to close due to official restrictions.
Then it was announced that the CJRS would stay open until March 2021, delaying the start of the JSS to April 1/21. The JSS provides a government subsidy against the wages of workers whose hours have been restricted to part-time because of the pandemic. It is likely HMRC will apply the same principles in that wages or salaries paid to employees for R&D work will be eligible for R&D tax relief and that any subsidy received by an employee for hours not worked will be ineligible for R&D tax credit relief.
Coronavirus Business Interruption Loan scheme (CBILS)
The scheme offers loans to SMEs where the government will pay the first 12-months of interest payments and any lender-levied fees.
The CBILS is classified as notified state aid. If you have a CBIL and spend the money in an area of business that is not related to your R&D claim, then your R&D projects will not be affected by this loan.
If, however, you have a CBILS and use it to fund your R&D projects, then those very R&D projects funded by the CBILS will not qualify under the SME scheme but can claimed under the RDEC scheme.
Care must be taken when applying for the CBILS as the intended purpose of the loan will impact the qualification of the R&D project for R&D Relief. If you are, or intend to make R&D relief claims, Please seek professional advice before applying for the CBILS.
Bounce Back Loans (BBLS)
The Bounce Back Loans scheme opened on the 4th of May 2020 to provide SME businesses guaranteed access to loans of up to £50,000. The loans are 100% backed by the government and are in the recipient’s account within 24 hours.
SMEs in the UK are rushing towards CBILS and BBLS as ways to sustain their businesses until there is a return of economic normality. The problem is, very few are aware of how these Schemes will affect their ability to claim for SME R&D tax relief, and many will inadvertently breach the rules. It is not clear how HMRC will respond to that, but they may have little choice but to follow the rules as written.
For example, what is the best way SMEs could use say a £50K Bounce Back loan? Well, first we suggest that you, if possible, not apply the proceeds of the loan against any R&D spend. If that is not possible, we suggest concentrating the £50K in as few projects as possible. Let us say you spread the £50k of BBLS money across 3 R&D projects, all 3 R&D projects have now received Notified State Aid, which means that the SME cannot claim R&D tax relief under the SME scheme. While the SME can still claim R&D tax relief on all 3 State-Aid-funded projects, this must be done through the less-generous R&D Expenditure Credit (RDEC) scheme, which is primarily used by large companies.
What is the best possible scenario? If the SME has substantial running costs that have nothing to do with R&D at all, the best thing to do is use the BBLS funding against those.
As an example, let us say the SME has £80K of non-R&D costs and the same 3 projects as above.
This time, the SME uses the full £50k of BBLS against its non-R&D costs; this leaves its 3 R&D projects unaffected by Notified State Aid, meaning that it can claim through the SME R&D tax credit scheme for all 3 projects. Failing that, the SME can allocate the funds against one project rather than spread the funds amongst all 3. That way only one project is affected and can be claimed under RDEC while the other 2 can be claimed under the SME scheme.
Key things to remember about Notified State Aid and R&D projects
- SME R&D tax credits, CBILS and BBLS are all forms of Notified State Aid.
- You can only use one form of Notified State Aid per project, for the entire lifetime of the project. You cannot pay back one form to get another.
- The effect of using Notified State Aid on an R&D project is to push the entire project’s expenditure out of the SME scheme and into the RDEC scheme, which gives a return of about 13p per £1 (before tax) rather than the 25-33p per £1 of the SME scheme.
- When allocating any form of Notified State Aid to R&D projects, the golden rules are:
- If you can, first use the funding on non-R&D activities.
- Concentrate the remainder of the Notified State Aid on as few R&D projects as possible.
The rules regarding the interaction of receipt of government support measures and R&D tax credits can be quite complex. We have prepared over 10,000 R&D tax credit claims and can answer any questions on this matter.
Please get in touch with us if you have any further questions about how COVID-19 Government support measures may interact with and impact your R&D claim.