The Impact of COVID-19 Government Support on R&D Tax Credits
In response to the COVID-19 pandemic, the Government has provided a range of financial support to businesses in the United Kingdom.
As these businesses begin to look to make claims for R&D expenditure that occurred during 2020 and the first half of 2021, we are now beginning to deal with queries surrounding the impact of this financial support on making an R&D claim.
There are two schemes under which and R&D claim can be made:
- The SME Scheme
- The RDEC Scheme
As we have covered previously, the SME scheme has a more generous return (up to 33% vs 13%) but is unavailable to Large Companies with over 500 employees (or breaching €100 million turnover and €86 million gross assets).
R&D tax reliefs under the SME scheme are not available for expenditure that is “subsidised”. However, there is no such provision under the RDEC Scheme.
What is Subsidised Expenditure?
Expenditure is treated as subsidised “to the extent that it is otherwise met directly or indirectly by a person other than the company”.
Therefore, if a grant or subsidy is received which is subsequently spent on R&D expenditure, the expenditure is classed as subsidised to the value of the grant or subsidy.
The key point here would be where the grant or subsidy is allocated. If it is not spent in qualifying categories of expenditure for R&D, but instead on other expenditures, then the R&D expenditure may not be considered subsidised.
To add some further detail:
Where a project has received any funding which is a notified State Aid, then no expenditure on that project can qualify for the R&D tax relief under the SME scheme. This would extend beyond the value of the grant or subsidy to ALL expenditure on the specific R&D project.
This is a common scenario we encounter where Innovation Grants have been awarded for a project.
So what about COVID-19 Government support?
- Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme (CJRS) is not a notified State aid. However, subsidy rules still apply, meaning that the expenditure has to be treated as having been subsidised and will therefore not qualify for relief within the SME scheme.
However, under the CJRS one of the key conditions for an employee to be furloughed was that they have been instructed by their employer to cease all work in relation to their employment. Therefore, the furloughed employees should have ceased all work during the CJRS period and HMRC considers that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means that HMRC expect to see these costs excluded from R&D and RDEC claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.
- Coronavirus Business Interruption Loan Scheme
- Coronavirus Large Business Loan Scheme
- Bounce Back Loans
The three schemes shown above are all notified State aid, this could potentially prevent a claim for SME relief. However, HMRC have stated they would only expect this to happen where the loan relates specifically to the company’s expenditure incurred on an R&D project rather than providing general support for the company, in our experience this is unlikely. Furthermore, often the expenditure has been allocated to non-qualifying areas for R&D.
- Future Fund
The loans provided through the Future Fund scheme are not notified State aid.
- Recovery Loan Scheme
The Recovery Loan Scheme, was announced on 3 March 2021. In most situations HMRC do not consider that the receipt of these loans will have any effect on subsequent claims for Research and Development Expenditure Credit or for subsequent claims for the Small and Medium Size Enterprise Research and Development Relief.
As always with R&D Tax Relief – planning is key. Very healthy claims for R&D Tax Relief can still be filed alongside the Financial Support offered by the UK Government in response to COVID-19 and most detrimental effects can be avoided. However, this should always be done with clarity and certainty.
If you want to discuss any of the points above, please feel free to get in touch with us via phone or e-mail.
