R&D tax relief in a COVID-19 world
20 years on from its introduction R&D tax relief remains a highly valuable incentive for innovation. However, the pandemic has focused minds on particular aspects, with other changes coming as well.
Innovation to survive
The pandemic has caused new R&D to be carried out. An obvious example is companies rushing through new designs for ventilators and CPAP machines. However, a more subtle example could be, changing manufacturing processes to comply with social distancing, which leads to scientific or technological advances.
R&D expenditure that is “subsidised”, rather than funded by the company, is only eligible for R&D Expenditure Credit (RDEC), not the more beneficial SME relief. Where the subsidy is a “notified state aid”, the entire project is disqualified from the SME regime.
How does this fit with pandemic support schemes?
- Coronavirus Job Retention Scheme (CJRS) and staffing costs
The CJRS is not a notified state aid, so does not disqualify a whole project but, as a subsidy, any salary funded by the CJRS cannot be part of an SME claim. However, as CJRS payments only fund the time furloughed employees are not working, they are not funding qualifying R&D so cannot be claimed under RDEC either.Nor can any top-up payments by the employer to the employee, employer’s NIC, pension contributions etc for the period of furlough.Extra care is needed when preparing claims for periods covered by furlough, to ensure ineligible amounts are not accidentally included.
- Holiday and sick payHoliday and sick pay are necessary costs of employees undertaking R&D, even where such payments are made during furlough. However, such costs are subsidised insofar as they are met from a CJRS claim, so to that extent would not be eligible for SME relief (but could be claimed under RDEC).
- CBIL / CLBIL / Bounce Back loans
These are notified state aids, so if used to fund an R&D project they disqualify the whole project. Companies should ensure this funding is targeted at non-R&D projects, to avoid inadvertently disqualifying projects.
Cash credit or carried forward losses?
Some loss-making companies carry forward their R&D losses rather than surrender them for the cash credit because they expect to be profitable in future, when the losses could be more valuable. This might change, with the new focus on cashflow meaning the company chooses to take the cash instead for any current claims.
R&D and deferred tax payments
HMRC usually set SME and RDEC payable credits against other tax debts before paying the surplus to the company, but where there is specific tax deferral support for Covid-19 (i.e. automatic VAT quarterly payment deferral), offset will not be made so the claim can be paid in full. However, if the company has deferred taxes as part of a Time to Pay arrangement (TTP), then any R&D claim will be set off against the TTP debt.
From April 2021 the amount of payable credit a SME can claim above a minimum claim of £20,000 will be restricted to three times the company’s PAYE and NIC payments in that year. Companies that rely heavily on sub-contractors and make large cash claims will be worst affected.
Our R&D experts have a wealth of experience in handling claims and are always happy to have an informal chat to determine if you might be eligible. Please speak to Robert Leggett for more information.
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