Following the economic damage caused by nationwide lockdowns amidst the COVID pandemic, the UK Government implemented a number of necessary financial measures to protect jobs and save businesses.
From loans and grants to the Coronavirus Job Retention Scheme (CJRS), businesses big and small have welcomed financial support in these turbulent times.
However, this has left many businesses unsure of whether their eligibility for R&D tax relief will be impacted by an increase in Government-funded support.
That’s where we come in.
Today, we’ll be exploring how COVID support could impact your business’s next R&D tax credit claim, offering up all of the vital information you need (and busting myths and misconceptions along the way).
Can you claim COVID support and R&D tax relief simultaneously?
Understandably, this has been a common question in recent months.
The short answer is yes - your business is able to claim COVID relief alongside some forms of R&D tax relief. It gets a little more complicated than that, though.
This is because the UK R&D initiative comprises two different avenues: the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme. The former is considered Notified State Aid, while the latter is not.
Why does this matter?
Well, much of the UK Government’s COVID funding is also considered Notified State Aid, and a project becomes ineligible for R&D tax relief if it has already received another form of NSA. On top of that, any expenditure being claimed must not have been subsidised, meaning relief would exclude any R&D expenditure funded via a grant.
All is not lost for larger companies claiming through RDEC, though, as subsidised expenditure (such as NSA) may still be eligible through this incentive.
SMEs not eligible for RDEC should focus on proper planning, undertaking research and development on a project-by-project basis. This way, you’re able to better balance how subsidisation is utilised, facing less risk as far as ineligible projects go.
Are your COVID adjustments considered eligible R&D?
Businesses have had to adapt to a ‘new norm’ over the past year, making many adjustments to their workspace and business model as a result.
Do these adjustments qualify as eligible R&D? Probably not.
The eligibility criteria surrounding what’s considered research and development hasn’t changed. Let’s give ourselves a quick reminder…
Eligible R&D projects aim to achieve an advance in overall knowledge or capability through the resolution of a scientific or technical uncertainty.
Has your business done this by making some minor changes to ensure your workspace is COVID secure? Unlikely.
Of course, that’s not to say some businesses haven’t conducted eligible R&D activity during their COVID adjustments. If you’ve pivoted your usual processes, or perhaps had to reimagine your product line following the pandemic outbreak, you may have embarked on eligible research and development.
If this is the case, as ever, you’ll be entitled to claim back on:
- Staff - the members of your workforce on your payroll
- EPWs - externally provided workers from a third-party staff provider, such as staffing agencies and personal service companies, or a hired freelancer
- Subcontracts - outsourcing of qualifying R&D projects could be eligible for up to 65% of relief under an SME R&D tax credit claim
- Consumables - materials consumed or transformed in the pursuit of overcoming scientific uncertainty
Does the Coronavirus Job Retention Scheme (CJRS) impact R&D eligibility?
The introduction of furlough through the 2020 Coronavirus Job Retention Scheme enabled many businesses to reduce their salary costs without losing employees. To this date, the Government is paying up to 80% of the salaries of furloughed workers (capped at £2,500).
Recently, the deadline for furlough was further extended to 30 September 2021 in the 2021 Budget.
As per the legal guidelines of furlough eligibility, a furloughed employee is not able to undertake any work pertaining to the business throughout their period of furlough.
So, how do furloughed employees fit into your R&D expenses claim? Well, since they’re not able to carry out any work within this period, they will not have directly engaged with any qualifying R&D activity.
Even if the furloughed employee would normally have been involved in R&D activities, current HMRC guidance states that employees furloughed at the time of your project can’t be considered involved. This means you won’t be able to include staffing costs pertaining to these employees in your R&D claim.
What if you’ve furloughed your ‘competent professional’?
HMRC requires the input of a ‘competent professional’ on your R&D claim to ensure its accuracy. But what if your competent professional has been furloughed?
As stated above, furloughed employees will be in violation of their status if they conduct any work pertaining to your business. This means you can’t utilise your competent professional as a ‘one off’ for your claim.
Instead, ask yourself whether there are any other technical staff within your company that have the required expertise and status to assist your claim. Statutory directors, for example, are still legally allowed to carry out statutory duties such as account filing, even when furloughed.
Can you wait until your competent professional is off furlough?
R&D tax credit claims are able to be filed retrospectively (as far back as two years before the end of the accounting period).
This means that, if you’d rather wait until you have the right people back for the job, you can. Although, this will, of course, mean a delay in payments, this can actually boast a range of benefits.
For example, while HMRC is sympathetic to the fact that key staff may be furloughed, your company remains entirely responsible for the accuracy of your claims. Utilising the wrong staff to prepare your claim, or relying on estimated figures and projections, could therefore do more harm than good in the long run - with the potential for compliance checks and potentially even penalties.
What about Bounce Back Loans?
The Bounce Back Loan (BBL) scheme was first announced in 2020 and targets small and medium-sized businesses affected by the pandemic. The scheme enables these businesses to file for loans of up to £50,000. The loan is 100% guaranteed by the UK Government and no fees or interest are attached for the first 12 months.
Unfortunately, BBL is considered Notified State Aid and therefore can’t be claimed alongside R&D tax credits on the SME scheme.
Is your business’s COVID relief considered NSA?
Aside from the funding and job protection schemes already covered, there are other forms of financial support that have been opened up to businesses throughout the pandemic.
Remember: you won’t be able to claim R&D tax relief through the SME scheme on the same project that’s been subsidised through NSA. This means your R&D claims may be affected if you’ve received:
- Retail, Hospitality and Leisure Grant Fund (RHLGF): grants for these industries are considered Notified State Aid and may conflict with R&D claims
- Innovate UK grants and loans: whether this funding constitutes NSA is judged on a case-by-case basis - you can find out whether yours has been classed as Notified State Aid within your funding documentation
Is it business as usual at HMRC?
HMRC was quick to state that it understood the importance of maintaining a ‘business as usual’ approach throughout the pandemic. They even deployed additional resources to help maintain turnaround times when processing claims.
This means that, on the whole, you should expect R&D tax claims to take no longer than they did pre-pandemic.
Whatever your industry, whatever your business, the past year has been tough. This makes it more important than ever to understand what funding is readily available to your business.
To maximise your R&D tax relief and get your claim right the first time, get in touch with Lumo to discover how we can help.