With the introduction of various Government schemes to support businesses during the coronavirus crisis, it's worth reviewing how these schemes might potentially impact your future Research and Development (R&D) Tax Credit claims. This article looks specifically at how notified state aid rules, government-backed support loans and the furlough scheme may impact the SME R&D Tax Credit scheme.
What are R&D Tax Credits?
R&D Tax Credits are a Government incentive to support innovation and development within the UK, delivered as a tax break by HMRC. They provide rebates or reductions of up to 33% against Corporation Tax for the costs attributed to such activity, even if the project failed.
HMRC have specific criteria as to what qualifies for R&D Tax credits, such as projects involving 'advances in science and technology' and having 'technological uncertainty' at the outset.
During the pandemic, HMRC has worked very hard to ensure all such applications are processed as quickly as possible and has deployed additional resources to help with processing R&D claims. Currently, the vast majority of applications are being turned around within their guideline timeframe of 28 days, which is excellent news.
What is the significance of state aid?
The important thing to note is that R&D tax credits for SMEs are a notified state aid. This means that a project cannot be included in an SME R&D tax credit claim if it has received another form of notified state aid.
From an R&D tax perspective therefore, when considering the impact of any loan or grant on any of your R&D claims, you need to check whether the loan or grant is a notified state aid.
The most high-profile loan scheme to be brought in as a result of the coronavirus pandemic is CBILS (Coronavirus Business Interruption Loan Scheme). HMRC has confirmed that these loans are notified state aid.
That does not mean that if you receive a CBILS loan, you cannot claim R&D tax credits, but you need to be careful. Essentially it depends on how you intend to utilize the loan. If, for example, the CBILS facility is used to buy raw materials to keep your production line running and therefore production staff working, this has nothing to do with R&D projects or expenditure, so having a CBILS loan won’t impact next year’s R&D tax credit claim.
But accurate documentation and record keeping will be needed to evidence the precise use of the loan if questioned at a later date. The key, therefore, is careful planning on a project-by-project basis if you want to utilize any kind of notified state aid alongside R&D tax credits.
Bounce Back Loans
The Bounce Back Loan Scheme (in which the Government guarantees 100% of the loan with no fees or interest to pay for the first 12 months) is similarly designated as notified state aid and, as a result, similar precautions are required.
There are some possible wrinkles around ‘de minimis’ amounts of state aid, given the smaller size of these loans, but it's still essential to be clear about the loan purpose, as this is what you have to bear in mind when considering the impact of R&D Tax credits.
The Coronavirus Future Fund
The £500m Future Fund, available from May 2020 to January 2021, does not qualify as state aid and therefore the possible conflict with R&D Tax credits does not arise.
Furloughed staff are by definition not working and therefore it is not possible for them to be directly and actively engaged in R&D as is required by the R&D legislation.
If you have furloughed members of your R&D team or other employees who are indirectly involved in R&D, then they cannot count towards the R&D tax claim for the period of their furlough. Of course, because R&D is a retrospective credit, the impact of furloughed staff will not be felt until you make your R&D claim for 2020.
There is another potential issue with furloughed staff and current R&D Tax credits, and that revolves around the ‘competent professional’ requirement when completing an R&D claim. If all appropriate competent professionals are furloughed, they cannot assist in producing the claim. Rules are slightly different for furloughed company directors so please check with your advisers on this.
The above is intended purely as a brief summary of some of the issues to consider, not advice. Every case will be different depending on individual factors such as whether key staff have been furloughed, the use of government support measures, and the parameters of the R&D project itself. Therefore, company and project-specific advice is required from your R&D Tax expert.
There are no hard and fast rules here, the relationships are complicated, and it needs an expert eye so please speak to someone with the necessary expertise before proceeding with both R&D Tax Credits and other state aid loans.
About the Author
Alistair Aird is Head of Partnerships at Easy R&D. Easy R&D are a fast-growing national tax consultancy focused on working with SMEs to reclaim R&D Tax rebates from HMRC. They have extensive experience at dealing with the many nuances of R&D Tax credits.