COVID-19 and Research & Development tax relief – the good news and the stumbling blocks
‘Turnover is Vanity – Profit is Sanity – Cash is King’. This popular saying has never been more relevant for British businesses as during the COVID-19 crisis.
In these difficult and uncertain times, it’s vital for your business to understand the various funding options they can access. Needless to say, innovative businesses shouldn’t miss out on Research & Development (R&D) Tax Relief, one of the most beneficial tax incentives available to companies, and an invaluable source of additional funding for innovation.
If eligible, SMEs can claim additional tax relief of up to 25p per £1 on qualifying R&D projects – developing new products, improving processes, increasing efficiencies, etc.
Companies which don’t qualify for the SME scheme may be able to make a claim under the R&D Expenditure Credit (RDEC) scheme. Additional tax relief under the RDEC scheme is around 11p for each £1 of eligible expenditure.
17th March 2021
The good news
- In respect of R&D claims, HMRC have generally acted pragmatically and flexibly through the COVID-19 disruptions
- They have said that they will be sympathetic to those struggling to meet submission deadlines due to COVID-19 and may accept late claims
- You have two years from the end of the accounting year to submit a claim (e.g. claims for the year ended 31 March 2019 must normally be submitted by 31 March 2021)
- HMRC have allocated an extra resource to processing R&D claims and they’re currently meeting their aim of clearing 95% of SME claims within 28 days.
The stumbling blocks
- Businesses with unpaid tax liabilities may see these off-set against any R&D repayments due to them. Where the repayment relates to a claim made under the SME scheme, HMRC has a discretion to consider the offset on a case-by-case basis, if an objection is raised. For RDEC claims the offset is automatic and HMRC can’t relax this without legislative changes. R&D repayments will not be offset against any VAT payments postponed under the COVID-19 VAT deferral payment scheme
- To be able to claim R&D tax relief, the company must be a going concern according to the last published accounts. The company mustn’t rely on the R&D repayment to remain solvent.
The good news
If your business is eligible for R&D tax relief, you can make a claim alongside the COVID-19 emergency funding. They aren’t mutually exclusive. There are some complexities to navigate through, but with care and right advice, the majority of businesses will not see their R&D claims materially affected.
The stumbling blocks
Generally, claims under the more generous SME scheme maybe restricted where a company has received some form of a grant or subsidy. This includes various COVID-19 Government support schemes. No subsidised expenditure can be included in a claim under the SME scheme. If the grant is classed as notified state aid, the entire R&D project which benefited from the grant is excluded from the SME scheme. Usually, a claim under the less beneficial RDEC scheme can be still made for any excluded subsidised expenditure.
Furloughed Staff – Coronavirus Job Retention Scheme (CJRS) / Coronavirus Job Support Scheme (JSS)
This scheme was introduced to support businesses. Under the scheme, the Government pays staff up to 80% of their salary whilst on furlough (with a cap of £2,500).
It probably will not come as a surprise that, whilst staff are on furlough and therefore not contributing to any R&D projects, their time spent on furlough can’t be included within the R&D claim.
The schemes above are not classed as notified state aid.
Coronavirus Statutory Sick Pay Rebate Scheme (CSSP)
Perhaps the most surprising news of all is that, if a company has claimed under the CSSP Rebate Scheme, it’s classified as notified state aid. The impact of this is that, if a member of staff worked on an R&D project and CSSP was claimed in respect of that staff member, the whole amount of the project expenditure is required to be calculated under the RDEC scheme instead of the SME scheme.
The above will not only affect the year in which the claim was made but any subsequent years that the project is included within an R&D claim.
If you haven’t claimed CSSP yet but are thinking about it, we would advise you to think twice about reclaiming it if you are hoping to make an R&D claim involving that staff member. This decision could save you a small fortune.
Loans – Coronavirus Business Interruption Loan Scheme (CBILS) / Bounce Back Loan (BBL)
HMRC has confirmed that the loans stated above will constitute notified state aid. The good news is that this is only likely to affect the R&D claim if it was taken out specifically to fund R&D projects, meaning that any loans taken out for the general day-to-day running of the business will seldom impact the R&D claim.
Coronavirus Future Fund
Future Fund loans are not classified as notified state aid and will therefore not impact the R&D claim.
COVID-19 specific grants
Any coronavirus-specific grants are unlikely to affect the eligibility or calculation of the R&D claim unless they were specific to the R&D projects. This can be a complex area so please get in touch with us if you think you may be impacted.
Innovate UK Continuity Grants and Loans
Innovate UK introduced the Continuity Grants and Loans as a part of their COVID-19 response package, to support existing Innovate UK award holders.
Innovate UK grants and loans are usually classed as notified state aid and tend to be project specific. As such the projects funded by Innovate UK are likely only eligible for RDEC scheme.
However, details of the grant or loan documentation should be always carefully reviewed to confirm the scope and classification of the subsidy on case-by-case basis.
A note on Brexit
Although the impact of Brexit is that Britain has left the EU, the treatment of grants for R&D purposes remains unchanged at this time. We expect to see fewer grants issued that are classed as notified state aid in the future.
Now more than ever, is a good idea to consider whether you may be eligible for R&D tax relief as this will aid your cash flow.
R&D is a complex and ever-growing area. With the additional COVID-19 complexities, the risks of submitting an incorrect claim and of a HMRC enquiry are at their highest.
Enlisting the help of a reputable R&D adviser to build a robust claim doesn’t only reduce the risk of enquiry though as often additional expenditure can be identified alongside assistance with record-keeping requirements and helping your staff identify R&D in real-time instead of after the event.