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 COVID-19 support measures 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?
HMRC has reiterated that it understands the importance of ensuring payments reach companies quickly during this ongoing period of economic uncertainty.
HMRC has delivered efficient processing times for R&D claims throughout the pandemic. Timings around RDEC claims specifically slipped a little due to the Christmas busy season, but HMRC has been providing regular updates to ForrestBrown (as a member of the R&D Consultative Committee) throughout.
It’s worth noting that additional security checks on larger payments may delay the cash reaching a company.
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 COVID–19 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. As such, 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 relief 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 relief claim.
- R&D grants and loans from Innovate UK: The State Aid status of these will be confirmed in each case within the grant documentation. 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.
The best way to optimise your future position is to get an expert on your side. If you need expert help, get in touch right away.
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, I have a client that applied for CBILS to purchase materials to keep their production lines running and production staff working during the first lockdown. 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 their R&D tax credit claim?
The Coronavirus Job Retention Scheme (CJRS) allows companies to “furlough” employees, and the government will pay up to 80% of the salaries of those workers (up to a cap of £2,500).
Between 1 August 2020 and 31 October 2020, this government contribution decreased by 10% each month and the scheme was set to end on 31 October 2020. However, just as it was due to close, a new, month-long national lockdown coincided with the scheme’s extension until March 2021. This deadline was extended further until 30 September 2021 in the Chancellor’s Spring Budget 2021.
Based on HMRC’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.
Furloughed workers and R&D tax credits
When an employee is furloughed, they will not be carrying out any work, and therefore will not be directly and actively engaged in R&D activities.
HMRC has provided detailed guidance on the interaction between CJRS and R&D for tax purposes. Where staff normally engaged in R&D activities have been furloughed as a result of the coronavirus pandemic. HMRC considers that those employees cannot be regarded as being directly or actively engaged in relevant R&D during those times.
Further details may be found in HMRC’s Corporate Intangibles Research and Development Manual at CIRD83200.
While we expect that some businesses will have been forced to reduce their R&D spend during this difficult period, others have reported an increase in innovation, as they look for new opportunities. Many businesses benefitted from the stability and cash flow of their R&D claim and have adapted the timing of their claim to reflect this.
If there are no available competent professionals in the business – how can an R&D claim be submitted?
To ensure the correct information is submitted to HMRC, input from the company’s competent professionals is essential to the preparation of a robust and accurate R&D tax credit claim.
It may be possible to prepare a protective, estimated R&D claim if your client’s competent professionals have been furloughed. Contact us to find out how.
If a competent professional is not available when a client’s R&D claim is being prepared, 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 a client needs 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.
Client’s 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.
Will HMRC offset an R&D claim against tax arrears?
R&D tax credits will be offset against debts which are subject to a Time to Pay arrangement. It is worth considering whether expediting the preparation of your R&D claim may help with upcoming tax liabilities.
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.
ForrestBrown supports accountants
This article is intended to help you, but circumstances vary and it is no replacement for trusted specialist advice where your specific case can be considered. Speak to ForrestBrown today if you have any concerns about COVID, State Aid and R&D tax.