Thousands of businesses are in the process of receiving generous relief from HMRC’s research and development (R&D) tax credit scheme right now – a welcome source of funding for many in this challenging climate.
As many UK businesses are aware, a full range of support measures have also been made available in response to COVID-19. But like R&D tax credits, some of these rescue routes qualify as notified State aid. Due to the rules surrounding EU State aid there can be implications for claims made under the SME scheme.
It’s crucial for companies to understand how government emergency funding can impact R&D tax incentives. Despite R&D tax credits still being a perfectly viable option alongside the government’s COVID-19 rescue packages, the relationship of how they interact is complicated.
Securing funding during uncertain times
If you haven’t started looking into an R&D claim yet, now is a better time than ever to see whether your company is eligible. Many companies mistakenly overlook R&D tax credits, believing their work doesn’t count towards R&D for tax purposes.
Businesses across most sectors are eligible under the scheme. Sometimes the qualifying activities aren’t obvious or may seem like everyday work, making it easy for businesses to miss out on significant cash repayments. R&D tax credits work under two regimes:
– Small and Medium Enterprise (SME) scheme – offering repayments of between 33p and 44p per every £1 spent on eligible R&D.
– Research and Development Expenditure Credit (RDEC) – repayments just over 10p per every £1 spent on eligible R&D.
This funding can be available within weeks and doesn’t need to be paid back – it’s a reward for businesses that have already invested in staff, materials and other project overheads. Find out further information here.
Getting the accounts in place
If you urgently need to find new reserves, get your accounts signed off as soon as your financial year ends. Only when the signed accounts are available can an R&D claim be submitted., which could make a huge difference to your situation. You can also shorten your period of account to bring forward your year and submit a claim earlier than usual to bring cash flow forward.
You must be a going concern to make a claim and accounts for your limited company must have been prepared on a going concern basis (you won’t receive a credit if you are in liquidation or administration). Also, putting off accounts preparation during these uncertain times could have implications of the going concern basis not being applicable.
Companies should weigh up which government measures they are eligible for and what combination is the best route for them. R&D tax credits might be one of these options, but companies that are really struggling need to be aware of the going concern criteria when making a claim – you can’t be entirely reliant on the credit payment as the only means to remain solvent.
Notified State Aid and R&D Tax Credits
Rescue packages like the Coronavirus Business Interruption Loan Scheme (CBILS) potentially compromise a company making a claim under the SME R&D tax credits scheme. This is because CBILS are, like SME R&D tax credits, notified State aid bound by EU rules. As a result, the amount of State aid which can be received is restricted.
It all depends on the facts surrounding individual scenarios, but if CBILS is received specifically for the company’s R&D expenditure on a project, rather than to generally support the business, it could restrict the claim and impact the company’s ability to claim under the SME scheme – but a claim under the RDEC scheme is still possible.
This is also true for the Retail, Hospitality and Leisure Grant Fund, which has also been designated as state funding. As mentioned, if an R&D project has received one form of notified State aid funding, it cannot fall within the SME scheme.
There is State aid funding that’s not notifiable. This is designated as de minimis – up to 200,000 euros of de minimis state aid can be received over 3 years before it impacts on notified State aids. The Small Business Grant Fund counts towards de minimis State aids and Bounce Back Loans may also have some State aid restrictions if the business was already in difficulty.
As business survival through these unprecedented times has utmost importance, if the schemes mentioned are crucial for business survival, then the impact on the R&D claim is required to take a back seat.
Furloughed workers and R&D tax credits
Claims made under the Coronavirus Job Retention Scheme (CJRS) allowing companies to “furlough” employees are not classified as State aid. These payments are usually funding main trading activities, not R&D projects. Moreover, if an employee is furloughed, they cannot undertake any work for the business during the furlough period, and won’t be actively involved in R&D activities when the CJRS is being claimed.
Claims submitted during this period are unlikely to be affected, because the R&D claim relates to earlier accounting periods (before the furlough began). However, as a result of lower R&D investment during this period, this might impact future R&D claims,
Make sure to keep records of when employees were working/not working on R&D to claim the full qualifying staff costs. It could be beneficial to investigate the costs of staff furloughed that previously worked on R&D projects, rather than applying a blanket apportionment percentage to the costs of employees over the whole period.
A restriction on the SME payable tax credit (now deferred until 1 April 2021) was due to cap credit at three times the company’ total PAY and NIC liability for the year of the claim. This could have negatively affected companies with fewer staff or those that mainly use subcontractors to carry out their R&D. However, final rules from HMRC are still pending.
Getting the claim right
As companies strive to optimise their cash flow situation as a result of the lockdown, HMRC has been put under pressure to process R&D credit claims quickly. In response, additional resources have been deployed to help with R&D claims demand.
It’s possible to make a claim even if your business is in hibernation mode. However, it’s important to get it right the first time. For businesses trying to survive right now there isn’t any room for error – an enquiry into a claim can be very costly, more so when a business can least afford it.
But with the right approach an R&D can be potentially transformative for many businesses that are struggling. Claiming the full potential of the tax relief can offer a lifeline for businesses with much needed financial support during this time of uncertainty. We’re here to help and support you through the claims process.
Get in touch with Tax Shop for further information.