In these trying times, British businesses have been assailed from all angles by bad advice. As trusted advisers to businesses across the UK, accountants are at the tip of the spear in the battle against COVID-19 misinformation.
In our particular field of expertise, R&D tax credits, we’ve seen first-hand numerous inaccuracies crop up around how the incentive interacts with the extraordinary measures recently rolled out by the government.
It’s more important than ever that accountants have access to clear, accurate information when answering client questions. So to help, we’ve compiled a few key questions we’ve seen crop up since this crisis started – and then we’ve used our award-winning expertise to provide the definitive right answer.
- Is HMRC still processing R&D tax credit claims?
- Can my client access government COVID-19 relief and R&D tax credits?
- If CBILS is State aid, how can it coexist with an R&D tax credit claim?
- If my client furloughs employees will it affect their R&D tax credit claim?
- What’s the difference between the Coronavirus Job Retention Scheme and the Job Support Scheme?
- If there are no available competent professionals in the business – how can a claim be submitted?
- Will HMRC offset an R&D claim against tax arrears?
Is HMRC still processing R&D tax credit claims?
It’s understandable, with so many aspects of our economy being shuttered or slowed down, that clients might have concerns over HMRC processing times or, indeed, whether the tax authority is operating at normal capacity.
HMRC has told us that they understand the importance of ensuring payments reach companies quickly during this period. They have deployed additional resources to help with processing R&D claims, which should help to manage processing times during this challenging period.
- They are currently reporting that SME and RDEC claims are being processed within 28 days.
- It’s worth noting that additional security checks on larger payments may delay the cash reaching a company.
Our current experience at ForrestBrown is broadly in line with this, and companies should expect to receive their cash in four to six weeks from submission. HMRC is sending us weekly updates on processing times.
Can my client access government COVID-19 relief and R&D tax credits?
At ForrestBrown, we’ve had quite a few questions crop up around how R&D tax credits interact with the slew of new government COVID-19 funds and schemes. The question ultimately revolves around ‘Can I have both?’. Yes and no. Let’s take a closer look.
State aid: CBILS, R&D tax credits and COVID19 relief measures
I’ve seen reports stating flatly that the government’s Coronavirus Business Interruption Loan Scheme (CBILS) and R&D tax credits are mutually exclusive for a business. Both are notified State aid, so, the narrative goes, one precludes the other.
But it’s not that simple. Firstly, CBILS is just one among quite a menu of government-backed aid packages available to UK businesses at the moment. And these different schemes have different State aid designations.
State aid, as a reminder, has to do with EU competition rules. From an R&D tax credit claim perspective, what is relevant is that:
- SME R&D tax credits are a notified State aid.
- A project cannot be included in an SME R&D tax credit claim if it has received another form of notified State aid.
- The expenditure on that project may be eligible for an RDEC claim. As a result, large companies, who are only eligible to claim RDEC, don’t need to worry about the interactions covered here.
COVID-19 grants/loans and State aid status
From an R&D tax perspective, when considering the impact of any loan or grant on your clients’ R&D claims, the first thing to check is whether the loan or grant is a notified State aid.
For general guidance, read In terms of the COVID-19 funding measures:
- CBILS: HMRC has confirmed that these loans are notified State aid. Note that there is also a Large Business Interruption Loan Scheme, for companies with turnover over £45m (this will include many SMEs for R&D purposes!) Because CBILS is a notified State aid, receiving these funds may conflict with SME R&D claims if not carefully planned.
- Bounce Back Loan Scheme: This scheme helps small and medium-sized businesses affected by COVID-19 with 100% government-backed loans of up to £50,000. These loans are a notified State aid, and therefore similar guidance applies as for CBILS. However, as the loan amounts are smaller, they may be classed as “de minimis” State aid. A company cannot claim SME R&D tax credits on R&D expenditure subsidised by de minimis State aid, but there is no impact if the de minimis aid is spent on any other project or business expenditure.
- Small Business Grants Fund (SBGF): These grants will generally be de minimis aid unless the total de minimis aid that the company receives exceeds the de minimis threshold (€200,000 over three years). Over the threshold, it is notified State aid. Because de minimis aid is aggregated, even if small amounts have been received under SBGF, it will still be necessary to check for each company.
- Retail, Hospitality and Leisure Grant Fund (RHLGF): These grants are notified State aid, so any retail, hospitality or leisure companies should be aware of potential conflict if they are making R&D tax credit claims.
- Future Fund: The government will offer loans which convert to equity, where a company raises matched funding privately. This measure has no effect on a company’s R&D tax credit claim.
- R&D grants and loans from Innovate UK: The State aid status of these is also still to be confirmed. Innovate UK grants and loans, however, are almost always notified State aid. They are typically specific to an R&D project, so companies in this situation often make claims under both SME R&D tax credits and RDEC.
If CBILS is State aid, how can it coexist with an R&D tax credit claim?
In large part, it depends on how a business aims to use the money. For example, last week I spoke to a client who is applying for CBILS to purchase materials so they can keep their production lines running and therefore production staff working.
This has nothing to do with R&D projects or expenditure, so CBILS won’t impact next year’s R&D tax credit claim. I advised them to be clear in the application and keep good records as the amounts are spent.
There is no hard and fast rule here, and you should be distrustful of anyone that says there is.
If my client furloughs employees will it affect my R&D tax credit claim?
One of the government’s key support measures is the Coronavirus Job Retention Scheme. Based on the government’s advice on the scheme, if an employee is furloughed, they cannot undertake any work for the business during the furlough period. This includes providing services or generating revenue.
So, for obvious reasons, during a furlough period, the worker will not be directly and actively engaged in R&D activities. Of course, claims being submitted during this period are unlikely to be affected because the R&D being claimed relates to prior accounting periods.
But – and there’s always a but! – your future R&D claims will be affected if you have furloughed workers who would have been involved in qualifying R&D projects. HMRC confirmed on 11 September 2020 that it considers those employees cannot be regarded as being directly or actively engaged in relevant R&D during those times. Further details may be found at the ICAEW page HMRC updates guidance on R&D tax relief and furloughed employees.
What’s the difference between the Coronavirus Job Retention Scheme and the Job Support Scheme?
It was announced in September that a Job Support Scheme (JSS) would go live in November, following October’s planned phase-out of the Coronavirus Job Retention Scheme (CJRS). But with the new nationwide lockdown (tentatively due to end 2 December), the more generous CJRS has been extended until March 2021. The JSS is slated to come into effect then.
The extended CJRS will offer support at the level offered in August. Businesses can furlough employees and the government will cover 80% of their wage up to a maximum of £2,500. Employers will have to cover National Insurance and pension contributions, however.
When the JSS eventually rolls out, it will shift more of the payroll costs onto employers. Modelled after Germany’s Kurzarbeit (short working) Scheme, JSS requires businesses to maintain viable jobs at part-time hours in return for government wage support. The scheme is open to all sectors and not only those particularly affected by the pandemic (e.g. hospitality, nightclubs, events, etc).
The scheme works retrospectively. Your client would pay its employees for time worked and claim back the correct proportion from the government. The cost of hours not worked would be split between your client, the government (through wage support) and the employee (through a wage reduction).
JSS was expanded shortly after launch to include further support for businesses forced to close due to official restrictions. If closed down due to lockdown, employers will not be required to contribute towards wages and only be asked to cover NICS and pension contributions à la the CJRS scheme.
With both CJRS and JSS, the potential for errors is high, especially if professional advice is not sought. R&D tax credit claims for this period will need careful consideration to prevent errors. HMRC has published guidance on the interaction between furlough and R&D claims and we will continue to monitor updates as they are released.
If there are no available competent professionals in the business – how can a claim be submitted, then?
To ensure the correct information is available to submit to HMRC, input from the company’s competent professionals is essential to the preparation of a robust and accurate R&D tax credit claim. But these days, that might be easier said than done.
Many businesses have furloughed staff. However, it may be possible for ForrestBrown to prepare a protective, estimated R&D claim.
The first thing to do is to check whether any other technical staff can step in to support the claim preparation. It is worth noting that statutory directors may be furloughed, but can still carry out their statutory duties, including accounts and tax filings, while furloughed, which means they may be able to help.
If you do need to file with estimated figures, they should be reasonable and as accurate as you can manage. The estimated figures can then be replaced with final figures once the competent professionals return to work.
Companies should be mindful of the statutory deadline for filing an R&D claim (two years from the end of the accounting period), and also that if their final figures are lower than the estimates, they will have to repay the difference and may face additional questions from HMRC or even penalties.
For that reason, it pays to engage a specialist to help with filing an estimated claim, to protect you from risk. HMRC will be sympathetic where key staff are furloughed, but the company remains responsible for the accuracy of its claims.
Will HMRC offset an R&D claim against tax arrears?
Many companies have questioned whether their R&D claim payment will be offset against any tax arrears, specifically if they have deferred their VAT payments, or entered into a Time To Pay arrangement with HMRC.
Before the pandemic, HMRC would routinely offset R&D claim payments against other arrears. However, with measures such as the VAT payment deferral now in place, it is worth understanding how the legislation works in terms of offsets:
- For SME claims, the R&D legislation allows a payable credit claim to be offset against any PAYE/NIC owed for the claim period. This means that credit payments should not be offset against any other arrears before being processed.
- For RDEC payments, step six requires HMRC to offset the RDEC payment against other liabilities with HMRC. This would include any PAYE/NIC or VAT payment which is overdue.
- The VAT deferral scheme which has been introduced in response to COVID-19 defers the VAT payment due date to the end of the 2020-21 tax year, therefore deferred VAT payments in this period are not overdue and HMRC has confirmed that R&D claim payments will not be offset.
Another thing to consider is any Time To Pay arrangements currently in place. HMRC are approving many Time To Pay applications at the moment. However, if a business makes such an arrangement, that counts as overdue tax. So R&D tax credits will be offset against debts which are subject to a Time to Pay arrangement.
HMRC understands that businesses will have been disrupted by COVID-19 and will be sympathetic to those facing problems with meeting filing deadlines. They may accept a late R&D claim submission if COVID-19 prevented filing on time. If you’re in this position, please do get in touch to discuss your options.