Many companies benefit from the UK’s generous R&D Tax credit regimes and now, more than ever, is a good time to review your company’s position to look at ways to maximise and accelerate claims to generate much needed cash. In addition, as some of the COVID-19 support packages offered by the Government qualify as notified state aid, this could impact on claims under the SME scheme, which is also a notified state aid, so it is important to understand the potential interactions.
What is the benefit?
The biggest misconception appears to be what constitutes qualifying R&D activities for tax purposes and often companies do not realise that they are eligible to claim R&D tax credits. The benefits are significant so it is worth considering whether your company could qualify.
As a reminder, R&D tax credits reward scientific and technological innovation via two regimes:
- Small and Medium Enterprise (SME) scheme – can generate cash repayments or savings of between 33p and 44p per £1 spent on qualifying R&D under the SME scheme.
- Research and Development Expenditure Credit (RDEC) – the cash repayments or savings are just over 10p per £1 spent on qualifying R&D under the RDEC scheme.
More information on the two schemes can be found here.
Claims can only be submitted once the signed accounts are available. It is therefore vital to get accounts signed off as soon as possible after the year end if you need the credit urgently. In addition, you may wish to consider shortening your period of account to bring forward your year end and enable a claim to be filed earlier than usual.
Under the SME scheme only a company which is a going concern at the time a claim is made can claim the extra deduction and the cash credit. This means its latest accounts must have been prepared on a going concern basis and the company must not have been solely reliant on the credit to make it a going concern. Delaying accounts preparation in the current climate may increase the risk of the going concern basis not being applicable. Companies in administration or liquidation cannot make a claim.
State Aid and COVID-19 rescue packages
As the SME scheme is a generous tax break, it is classified as a notified state aid under EU law. Depending on Brexit negotiations and at the very least until 31 December 2020, the UK is still bound by these state aid rules.
The amount of state aid which can be received is restricted and R&D projects which have received another notified state aid cannot fall within the SME scheme, although a claim under the RDEC would still be possible.
Some state aid funding is not notifiable and is classed as de minimis. Up to 200,000 euros of de minimis state aid can be received over a 3 year period before it impacts on notified state aids. The Small Business Grant Fund counts towards de minimis state aids. Bounce Back Loans may also have some state aid restrictions if the applicant was a “business in difficulty” as at 31 December 2019.
At this time, the following COVID-19 rescue packages have been designated as notified state aid:
- Coronavirus Business Interruption Loan Scheme (CBILS)
- Retail, Hospitality and Leisure Grant Fund (linked to the Expanded Retail Rates Discount)
If either of the above notified states aids relate specifically to the company’s R&D expenditure on a project rather than being intended more generally to support the company this could restrict a claim. This will depend on the facts of each case.
Other grants and subsidies can also impact on a claim so we would recommend that you seek advice when looking for financial support for projects, so you can understand how it will affect your R&D tax credit claim.
The survival of a business is paramount so if the above schemes are essential to allow your business to keep operating then the impact on the R&D claim will be of secondary importance.
Staff costs and furloughing
Any claims made under the Coronavirus Job Retention Scheme (CJRS) are not classified as state aid. In addition, these payments are generally funding the main trading activities and not allocated to a specific R&D project, and as furloughed employees are not allowed to work they cannot be involved in the project at the point the CJRS is being claimed.
It is important to keep records of when employees were and were not working on R&D projects, in order to support a claim for qualifying staff costs. If furloughed staff are on reduced salaries because of the CJRS 80%/£2,500 cap but were previously engaged in R&D activities, it may be beneficial to look at their actual costs when working, rather than applying a blanket apportionment percentage to the costs of such employees over the accounting period.
A restriction on the SME payable tax credit was due to be introduced from 1 April 2020, but has now been deferred until 1 April 2021. Under this restriction the credit was to be capped at three times the company’s total PAYE and NIC liability for the year of the claim. This could have negative implications for those companies who have few staff and whose R&D is mainly carried out by subcontractors. The final rules will be announced by HMRC in due course.