At ForrestBrown, we’re getting numerous questions about how businesses can use research and development (R&D) tax incentives alongside the government’s new coronavirus funding.
In this blog, which we update regularly, we aim to provide an accurate appraisal of the situation for businesses and clear up some inaccuracies we have seen published elsewhere.
If you are an accountant, we have a specific version of this article for your attention: What your clients are wondering about R&D tax credits, COVID-19 and state aid.
Cash flow is a primary concern for businesses during this difficult time. As well as the specific government funding introduced since the start of the pandemic, R&D tax credits remain a generous form of government funding for innovative businesses.
Is my business eligible for R&D tax credits during COVID-19?
It goes without saying that to claim R&D tax incentives, you need to be carrying out qualifying R&D, which means doing something innovative (Read our website page R&D tax credits explained.)
Misinformation has appeared online about whether or not you can claim R&D tax credits alongside government emergency funding. Contrary to some reports, R&D tax incentives remain a perfectly viable funding mechanism for consideration alongside all of the emergency funding measures outlined so far.
They are not mutually exclusive, but their relationship can be complicated. At the heart of this are the rules that govern notified State aid. The key to using any kind of notified State aid alongside R&D tax credits is careful planning on a project by project (not entity) basis. The principle remains the same as other types of grant funding and R&D tax credits. For more on this, read our previous blog: R&D tax credits and grants – how to use both.
Contrary to some reports, R&D tax incentives remain a perfectly viable funding mechanism for consideration alongside all of the emergency funding measures outlined so far.
The best way to optimise your future position is to get an expert on your side. If you do want expert help, get in touch right away.
Your business must be a going concern to claim R&D tax credits
Hopefully the extraordinary measures rolled out by the government in the past few weeks will really help businesses who are facing potential concerns about solvency.
In terms of R&D tax credits, you must be a going concern to make a claim, and you won’t receive a credit if you are in liquidation or administration. It is also important to note that you cannot rely on the credit payment as the only means to remain solvent.
HMRC are sympathetic to the cash flow challenges facing companies right now, and cash flow is distinct from solvency. As ever, companies still need to budget and be aware of cash flow in order to stay solvent.
To help with this, companies should consider which government measures they are eligible for and what combination makes sense for their business. An R&D tax credit claim is certainly one of these options, but companies that are really struggling should be mindful of the going concern criteria when looking at claiming.
The impact of COVID-19 on companies’ going concern status has been seen on audit processes and timings as well. It is likely that companies who are required to publish audited accounts will see their auditors carrying out additional checks and this could affect their timetable for finalising accounts, which in turn affects their R&D tax credit claim timetable.
COVID-19 funding and R&D tax credits example
For those that are already claiming or hoping to claim R&D tax credits, and are interested in the interaction of COVID-19 government funding with R&D tax credits, we have used a hypothetical business to explore all the funding options outlined in the government’s excellent COVID-19 funding finder.
We then illustrate each one’s potential interplay with R&D tax credits to see how government COVID-19 emergency funding can be supplemented.
|Where is your business based?||England||We selected England but a business just needs to be a UK limited company.|
|How many employees does your business have?||0-249||Under the current R&D tax rules, your business doesn’t need to be running a payroll, but most R&D businesses have some employees or directors leading their projects.
You may have any number of employees, but note that fewer than 500 probably means you are an SME for R&D tax credit purposes, whereas 500 or more employees means you would claim under RDEC.
Read our KnowledgeBank article What is R&D tax relief? For more information.
|What is your annual turnover?||£85,000 to £45 million||You could have any level of turnover to claim, you can be profitable or loss making, and you can even claim if you are a start-up which is pre-revenue.|
|Are you an employer with a PAYE scheme?||Yes||See our KnowledgeBank: Can I still claim R&D tax credits if I don’t pay PAYE and NI?|
|Are you self-employed?||No||You must be a company to claim. R&D tax incentive are not available to self-employed consultants, or individuals.|
|What is the rateable value of your business’ non-domestic property?||£51,000 and over||Most R&D companies have a physical office, although not all and it is certainly not essential.|
|Is your business in any of the following sectors:||None||While R&D can occur in any sector, we’ve not included the specific funding for retail, hospitality and leisure businesses in this article.|
|Is your business in receipt of small business rate relief or rural rate relief as of 11 March 2020?||No||Business rate relief does not affect your R&D tax credit claim.|
|Are you due to pay a Self Assessment payment on account by 31 July 2020?||No||As above, R&D tax incentives are not applicable to individuals.|
Again, it goes without saying that to claim R&D tax incentives, you also need to be carrying out qualifying R&D, which means doing something innovative (Read our website page R&D tax credits explained.)
Using R&D tax credits and COVID-19 government funding
This sort of profile, common to many UK businesses, would then give you a list of COVID-19 funding options including:
- Coronavirus Job Retention Scheme (CJRS)
- Job Support Scheme (JSS)
- Coronavirus Business Interruption Loans (CBILS)
- Bounce Back Loans
- Innovate UK funding
- VAT deferral
- Time to pay
We examine these in more detail below.
Coronavirus Job Retention Scheme and R&D tax credits
One of the government’s support measures is the Coronavirus Job Retention Scheme. This allows companies to “furlough” employees, and the government will pay 80% of the salaries of those workers (up to a cap). It has been confirmed that this government contribution will decrease 10% each month from 1st August until the scheme closes on October 31.
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.
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.
Claims being submitted during this period will not typically be affected because the R&D activities have been carried out in prior accounting periods (before the furlough began). However, we’d expect to see the impact of this on R&D claims later this year and into 2021, as some companies report lower R&D investment during this period.
HMRC confirmed on 11 September 2020 its view on whether staffing costs will qualify for R&D tax relief where the 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 at the ICAEW page HMRC updates guidance on R&D tax relief and furloughed employees.
But what about the R&D you carried out in your last accounting period? Many companies are looking to accelerate the preparation of their R&D claim, as the cash boost will be very welcome at this time.
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.
However, it may be possible to prepare a protective, estimated R&D claim. Contact us to find out how.
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 really pays to engage a specialist to help with filing an estimated claim, in order 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.
Job Support Scheme
It was announced in September 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.
The JSS provides a government subsidy against the wages of workers whose hours have been restricted to part-time as a result of the pandemic.
Planning for job retention and support schemes
The announcement of a new and different scheme adds another layer of complexity for businesses and their advisers to understand. The JSS is retrospective, so — as the employer — you will need to pay staff for their hours worked and claim back the correct proportion from the government.
As with the CJRS before it, the potential for errors is high, especially if professional advice is not sought. Likewise, R&D claims for this period will need very careful consideration to ensure they are calculated correctly, and do not fall foul of the various interactions with notified State aid (as the JSS may be classified).
Coronavirus Business Interruption Loan Scheme (CBILS) and R&D tax credits
CBILS was announced shortly after the government’s Spring budget as a form of government funding to help businesses through the worst effects of social distancing. The scheme offers loans to SMEs where the government will pay the first 12 months of interest payments and any lender-levied fees.
However, there have been a number of challenges along the way resulting in the money being slow to materialise. Initially, there were reports of banks demanding personal guarantees and imposing eye-watering interest rates of up to 30 per cent.
Notified State aid and R&D tax credits
What’s being said about this? CBILs are (like SME R&D tax credits) notified State aid and some commentators have asserted that one always precludes the other.
However, one precludes the other only on a project basis (not an entire entity basis). If a project has received one form of notified State aid funding, then it cannot receive another. So a project funded with money from a CBIL cannot then feature in an SME R&D tax credit claim. It can still be included in an RDEC claim. Because the rules work on a project-by-project basis, it is possible for business to receive a CBIL and claim SME R&D tax credits, but it is complex and the best thing to do is talk to an expert who deals with R&D tax credits every day.
For more information on different types of innovation funding and Notified State aid read our blog Innovation Funding.
Bounce Back Loans and R&D tax credits
On 27 April, the government unveiled plans to launch the Bounce Back Loan scheme on 4 May. This scheme will help small and medium-sized businesses affected by coronavirus (COVID-19) to apply for loans of up to £50,000.
The government will guarantee 100% of the loan and there won’t be any fees or interest to pay for the first 12 months.
If you’ve already received a loan of up to £50,000 under CBILS and would like to transfer it into the Bounce Back Loan scheme, you can arrange this with your lender until 4 November this year.
More information can be found on the Gov.uk website page:
In terms of the interaction between Bounce Back Loans and R&D tax credits, Bounce Back 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.
Innovate UK funding and R&D tax credits
If you’re looking at the new Innovate UK funding, bear in mind that it is ultimately your responsibility to understand how it interacts with other forms of funding you have received. Don’t rely on your grant providers to keep track if you have accessed different forms of funding.
As Innovate UK funding is for R&D, the interaction between these funding measures and R&D tax credit claims can get complex and we’d recommend you contact us, as a specialist who deals with such matters day in, day out. Innovate UK funding announced by the government in response to COVID-19 takes the form of an increase in grants and loans available for SMEs carrying out R&D.
Innovate UK grants and loans
Innovate UK will be offering up to £750m in grants and loans to SMEs carrying out R&D.
Generally, Innovate UK grants and loans are notified State aid, and they tend to fund specific R&D projects. As covered above on CBILS, this means that receiving an Innovate UK grant or loan for an R&D project probably means that project cannot be included in your SME R&D tax credit claim. But you should consider the benefits of making an RDEC claim for the qualifying expenditure on this project, and also don’t miss other R&D projects which can still be included in your SME R&D tax credit claim.
It is really important to review your grant paperwork (there will usually be a lot of it!) and check out our grants and R&D tax credits blog for guidance on the status and impact. If unsure, seek advice. There really is no substitute for professional advice which is specific to your business.
British Business Bank Future Fund
To access the British Business Bank Future Fund you must also have received £250k seed funding before (so this is aimed at those businesses looking for something to fill the VC void between funding rounds). The Future Fund does not affect your R&D tax credit claims.
More details can be found on the .GOV page Apply for the coronavirus Future Fund.
VAT deferral and R&D tax credits
The government has allowed businesses to defer any VAT payments due from 20 March to 30 June this year until the end of the tax year. VAT returns still need to be filed, but there is no application which needs to be made.
A number of 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.
Will HMRC offset an R&D claim against tax arrears?
We know that prior to the pandemic, HMRC’s systems 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 are overdue.
- However, 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.
Time to Pay arrangements and R&D tax credit claims
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.
R&D tax credit processing times during COVID-19 pandemic
Generally, HMRC have been proactive and sympathetic to the challenges being faced.
Some very positive news here. 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 4 – 6 weeks from submission. This is something that we monitor closely at ForrestBrown so we will be keeping our clients up to date on processing times during this period. HMRC is sending us weekly updates on processing times.
Ask an expert about COVID-19 funding and R&D tax credits
ForrestBrown works closely with the Chartered Institute of Taxation (CIOT) and I have a seat on HMRC’s R&D Consultative Committee through which to maintain open dialogue. We are also working closely with HMRC at this time to keep R&D tax credit claims moving quickly and ensure that our clients understand their options.
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.
Understandably businesses are focused on the here and now, but it will pay to ensure you don’t miss out on future claim value. Ultimately, the sooner you start the process, the sooner you will receive the benefit.