In response to the COVID–19 pandemic (and the ensuing lockdown restrictions), the government announced a raft of measures to protect jobs and keep companies afloat.
At ForrestBrown, we received (and continue to receive) numerous questions about how businesses can access research and development (R&D) tax incentives alongside the government’s Coronavirus funding.
In this blog, we 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.
FAQs about COVID-19, State Aid and R&D tax relief
- Can I claim R&D tax relief alongside other COVID–19 reliefs?
- What are some common myths around COVID–19 and R&D tax relief?
- I’ve had to adapt or transform my business model during the last twelve months. What associated costs can I claim R&D tax relief for?
- How does the Coronavirus Job Retention Scheme (CJRS) affect R&D tax relief?
- How do the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans (BBL) affect R&D tax relief?
- What are the other forms of COVID–19 support – and how do they affect R&D tax relief?
- How have R&D tax relief claim processing times been affected by the COVID–19 pandemic?
- What allowances is HMRC making for businesses disrupted by the COVID–19 pandemic?
Can I claim R&D tax relief alongside other COVID–19 reliefs?
The short answer is yes. But the full answer is more nuanced.
R&D tax relief comprises two separate incentives: the SME R&D tax credit and the Research and Development Expenditure Credit (RDEC). The more generous SME credit is Notified State Aid and the less generous RDEC is not.
To be eligible for SME relief, R&D expenditure must not have been subsidised, so receiving a grant will exclude any R&D expenditure funded with that grant money from an SME claim.
Many of the Coronavirus emergency measures are also 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.
Subsidised expenditure (or a subsidised project in the case of Notified State Aid) may, however, be eligible for an RDEC claim. As a result, large companies, who are only eligible to claim RDEC, don’t need to worry about many of the interactions covered here.
The key to using any kind of grant or subsidy alongside R&D tax reliefs 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.
Worth remembering: Your business must be a going concern to claim R&D tax relief. You won’t receive a credit if you are in liquidation or administration. It is also important to note that you cannot rely on your R&D credit payment as the only means to remain solvent.
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.
What are some common myths around COVID–19 and R&D tax relief?
The pandemic has, understandably, been a difficult and confusing time for many of us. As the UK adjusted to life in an ongoing pandemic (and as we finally emerge from it), many misconceptions have taken hold.
R&D tax relief, like many other things, has been affected by its share of myths and misconceptions. These myths include:
Government COVID–19 support and R&D tax relief cannot be used at the same time:
See the above section for a full explanation, but this is simply untrue. Yes, there are nuances and this area can be complex – but with careful planning different forms of State Aid can coexist peacefully.
You can claim R&D tax relief for any and all COVID–19 adjustments:
A few reckless ‘advisers’ have pushed the idea that improvements and adjustments to make workplaces COVID secure qualify for R&D tax relief.
One particularly egregious example counselled that eligible projects included building bike storage and using a dedicated meeting room for social distancing purposes. Common sense will tell you that bike storage is not R&D.
We have worked with a number of businesses who have carried out genuine R&D projects triggered by the impact of COVID-19, but we would caution any business to consider their projects carefully in the context of the legislative definition of R&D.
HMRC will ignore any COVID relief I’ve received when looking at my R&D tax relief claim
All throughout the COVID—19 pandemic HMRC has promised to be pragmatic. But ‘pragmatic’ is not the same as ignoring clear laws on the use of State Aid and how these different subsidies interact. The law is the law, as the old saying goes. Any advice that runs contra to this should be viewed with suspicion.
My R&D tax relief claim has been ‘accepted’ by HMRC
Talk of ‘accepted’ claims is a linguistic quirk that’s slipped into usage among certain advisers. There is no such thing: HMRC doesn’t ‘accept’ the claims that they process. Even if you’ve received money from your claim, HMRC can recoup any benefit it believes was paid out in error.
In recent times, HMRC has brought on an extra 100 staff to its R&D tax compliance team. These extra personnel are working their way through claims submitted during the pandemic and enquiry cases are on the increase.
I’ve had to adapt or transform my business model during the last 12 months. What associated costs can I claim R&D tax relief for?
There is absolutely scope for R&D to take place if you had to pivot, adjust or roll out new products or processes in the past year. Indeed, ForrestBrown has worked with many businesses that have carried out R&D in response to the crisis.
That said, the standard for what constitutes R&D remains unaltered. The government defines R&D for tax purposes as activities that seek to:
- Achieve an advance in overall knowledge or capability in the field of science or technology.
- Resolve scientific or technical uncertainty.
With that in mind, you can claim for the following associated costs:
- Staffing costs
- Subcontracted R&D (subject to restrictions if claiming under RDEC)
- Externally Provided Workers (EPWs)
- Payments to the subjects of clinical trials.
As discussed earlier, there is some uncertainty and potential complexity if you claim R&D tax relief and your business has utilised any COVID–19 support. If you do want expert help, get in touch right away.
How does the Coronavirus Job Retention Scheme (CJRS) affect R&D tax relief?
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. 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 competent professionals have been furloughed. Contact us to find out how.
If a competent professional is not available when your 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 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, 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.
How do the Coronavirus Business Interruption Loan Scheme (CBILs) and Bounce Back Loans (BBL) affect R&D tax relief?
CBILS was announced shortly after the government’s 2020 Spring budget as a form of government funding to help businesses through the worst effects of social distancing. The scheme offered loans to SMEs where the government will pay the first 12 months of interest payments and any lender-levied fees.
Notified State aid and R&D tax credits
CBILs are (like SME R&D tax credits) Notified State Aid and we have seen much misinformation in this area. Some commentators have asserted that one always precludes the other, others have asserted that CBILS can be ignored when preparing an SME R&D claim.
Both of these are incorrect. 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 CBILs loan cannot then feature in an SME R&D tax credit claim. But, it can still be included in an RDEC claim.
Because the rules work on a project-by-project basis, a business can receive a CBIL and claim SME R&D tax credits, but this interaction can be 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 2020, the government launched the Bounce Back Loan (BBL) scheme, which launched on 4 May. This scheme was targeted at small and medium-sized businesses affected by Coronavirus (COVID-19) and enabled them to apply for loans of up to £50,000.
The government guaranteed 100% of the loan and a condition of the scheme was no fees or interest to pay for the first 12 months.
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, always check the paperwork for the grant award, as this will clarify the status of the grant. If in doubt, check with an R&D specialist who will know what to look for.
What are the other forms of COVID–19 support – and how do they affect R&D tax relief?
- 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, the grants will be Notified State aid. Because de minimis aid is aggregated, even if small amounts have been received under SBGF, it is still necessary to check the status in each case.
- 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: Via the Future Fund, the government offers loans that convert to equity, where a company raises matched funding privately. This measure would not normally affect a company’s R&D tax credit 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.
How have R&D tax relief claim processing times been affected by the COVID–19 pandemic?
When the pandemic hit, HMRC quickly communicated that it understood the importance of ensuring payments reached companies quickly. HMRC initially deployed additional resources to help with processing R&D claims, which helped them maintain good turnaround times as the pandemic took hold.
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.
What allowances are HMRC making for business disrupted by the COVID–19 pandemic?
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.
Ask an expert about COVID-19 funding and R&D tax credits
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.