During the COVID-19 pandemic, you may have put some of your employees on temporary leave (furlough) and made a claim through the Coronavirus Job Retention Scheme (CJRS). If this is the case, then it can have an impact on R&D tax relief claims.
Can I claim R&D tax relief for furloughed staff?
Staffing costs paid while employees were on furlough cannot be included in your R&D tax relief claim.
The main reason that this expenditure cannot be included in your R&D claim is that to make a claim under CJRS, furloughed staff members cannot do any work for you. Therefore they cannot reasonably be regarded as being actively engaged in relevant R&D activities during this time.
The excluded costs will include their gross salary for the furlough period, employers NIC and pension contributions – even if they were not fully covered by government funding.
From 1 July 2020, it was possible to be a flexibly-furloughed employee, which allowed businesses to bring back employees part-time. In these cases, employees still could not carry out any work in relation to their employment during a CJRS claim period. Therefore costs relating to furloughed time should be excluded from your staffing costs calculation.
CJRS is also considered a subsidy, which excludes the subsidised expenditure from SME R&D tax relief as well.
The interaction between staffing costs calculations and furlough relief can become very complex, particularly when flexible-furlough, holiday and sick pay are considered. We would recommend consulting a specialist tax adviser for advice on your specific circumstances. Call ForrestBrown on 0117 926 9022.
What if I’ve also claimed under the Coronavirus Statutory Sick Pay Rebate Scheme (CSSP)?
You may have also claimed back SSP under the temporary rebate scheme. This is separate from the furlough relief and could have a substantial effect on your R&D claim.
Because of the generosity of SME R&D tax credits, it is considered notifiable State Aid. This means its use may be restricted where a company has received other State Aid funding.
The government has confirmed that the CSSP is notifiable State Aid. This means that if you have claimed CSSP for an employee who has worked on an R&D project, then that project may be considered to have already received State Aid funding.
In these cases, the relevant project would be excluded from the SME R&D tax credit incentive and instead need to be claimed under research and development expenditure credit (RDEC) which is less generous with a narrower eligible cost base.
What other qualifying costs could be affected by COVID—19 funding?
There are many different COVID grants out there, and each could have a different impact on your R&D claim.
HMRC has advised us that most COVID funding is expected to be for general business running costs, rather than being directly related to R&D projects. They will, however, consider each case and the onus is on you to keep records to support your R&D tax relief claim.
If you do need to use a COVID grant to pay your R&D staff or subcontractors or buy materials that you plan to use in R&D, then you could be subsidising your R&D projects. Like CSSP, those costs, or potentially all expenditure relating to the same R&D project, would be excluded from the SME tax credit incentive. These costs need to be claimed under RDEC.