Coronavirus and R&D Tax Relief

28th August 2020

UPDATED TO REFLECT HMRC GUIDANCE ON 28 AUGUST 2020

(See bottom of this article for changes on the furlough scheme)

HM Revenue & Customs says it is doing everything it can to process R&D tax credit claims as quickly as possible in the current difficult climate.

In an email sent to the Chartered Institute of Taxation on 2 April 2020, the department has sought to clarify how it is dealing with claims, given the current urgency for companies to have cash whilst the government-imposed lockdown is affecting businesses.

R&D Returns and Payments

HMRC says its priority is to keep to its published aim of clearing 95% of SME tax credit claims within 28 days, and has brought in extra resource to achieve this.

Time limits for claims are prescribed in legislation, so they should be received by HMRC within 12 months of the statutory filing date of the company’s tax return.

However, where a company is unable to meet this time limit, it should still submit the claim as soon as possible. HMRC says it may be able to accept late claims.

Under Statement of Practice 5/01, HMRC has discretion on accepting late claims.

Set off of R&D claims against other taxes

HMRC was asked whether claims will be paid in full even where a business has other liabilities owing.

In the case of Research and Development Expenditure Credit (RDEC), HMRC has no discretion under the law to do this. But for claims to SME R&D tax credits, HMRC is considering its position.

Update regarding set off of R&D credits against other liabilities (28 May 2020)

HMRC has now provided more detailed guidance on set off.

  • Where the government has agreed that tax can be deferred to support businesses in the COVID-19 period, i.e. the VAT quarterly payment deferrals, RDEC or payable tax credit will not be set against any of those amounts before the revised due date.
  • Where tax has been deferred as part of a Time to Pay (TTP) arrangement, HMRC will set any R&D tax credit off against any TTP liability, not just the amount owing at the point in time the credit is paid. This would include informal deferrals offered in advance of TTP arrangements being put in place.
  • The legislation requires any RDEC to be set-off against any liability owed to HMRC, and HMRC does not have and powers to relax those rules. There are no plans at present to change the legislation.
  • HMRC has discretion as regards set off of credits under the R&D SME scheme and it will consider the particular circumstances on a case by case basis if there are objections to the credit being set off against other liabilities.

Going Concern requirements

Under the rules, a claimant company must have been a going concern according to the last published accounts.

In many cases, such accounts will have been prepared before the effects of COVID-19, so that there should not be any issue caused by the going concern requirement.

HMRC says it is monitoring the impact of COVID-19 on the ability of companies to meet this and other requirements, and companies should approach HMRC if it is causing genuine operational difficulty.

State Aid

Government support schemes introduced in response to the Coronavirus, such as the Coronavirus Business Interruption Loan Scheme (CBILS), potentially compromises a company’s ability to make a claim under the SME R&D tax credits scheme, due to EU state aid rules.

Bishop Fleming has lobbied the Government on this issue and has asked the Treasury to clarify the position.

HMRC says the Government has notified CBILS as a State aid under the European Commission’s new Temporary Framework for COVID-19.

As such, the restriction on receipt of other State aid potentially applies, if the CBILS relates specifically to the company’s R&D expenditure (on a project) rather than being intended more generally to support the company.

This will depend on the facts, but HMRC says it will be monitoring the application of this rule, and welcomes feedback.

Update regarding government support schemes – state aid? (28 May 2020)

HMRC confirms that the:

  • Bounce Back Loans (BBL),
  • Coronavirus Business Interruption Loan Scheme (CBILS) and
  • Coronavirus Large Business Interruption Loan Scheme (CLBILS)

are all notified State aid, meaning that s1138(1)(a) CTA 2009 (subsidised expenditure) could potentially prevent a claim for R&D SME relief.

The department has also confirmed that it 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. This will depend on the facts, and HMRC notes that, for example, a loan used entirely for R&D might lead to s1138(1)(a) applying.

HMRC has also confirmed that the Future Fund, which provides convertible loans that are commercial, are not State aid.  Therefore, they are not caught by s1138 CTA 2009 and need not be considered when looking at the State aid cumulation rules.

The department also notes that further loans and grants and other support measures are still under development.  These will be State aid, and s1138(1)(a) CTA 2009 will apply to all of those which are provided through the EU Temporary Framework relating to State aid or through the Grant Block Exemption Regulations.

R&D Tax Credits and the Job Retention Scheme

Bishop Fleming has expressed concern that furloughed worker grants under the Coronavirus Job Retention Scheme would compromise R&D Tax Credit claims. 

The Incentives and Reliefs team at HMRC has confirmed to us that the grants will not compromise R&D Tax Credit claims, even though the grants are state aid. This is because the grants are for funding the main trade and not an R&D project, and furloughed employees cannot work and therefore cannot be involved in the project.

Further update on 28 August 2020

On 28 August, HMRC made some additional points as regards R&D and the furlough scheme:

  • Subsidy rules - SME scheme - CJRS is not a notified State aid, so state aid rules for furlough payments are not in point. However, the general subsidy rules do apply to the extent that furlough payments are made, meaning that the R&D expenditure has to be treated as having been subsidised and will therefore not qualify in the SME scheme. The only area where this is likely not to be the case is if annual leave or sick leave is taken during furlough.
  • The staffing cost rules - As furloughed employees have ceased all work during the CJRS claim period, HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times, so HMRC expects 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.  HMRC consider that furloughed employees cannot be regarded as being directly or actively engaged in relevant research and development. If some qualifying activity has been carried out then HMRC would expect companies to claim in the usual way under the appropriate proportion rules.
  • Absence from work for sickness or holidays - HMRC consider that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is, in effect, part of the cost of their working time. This means that HMRC allows claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time. HMRC consider that any period during furlough which is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation. However, for the reasons outlined above, the staffing costs incurred on leave and sickness during furlough are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies which only claim RDEC, it will prevent this element of the staffing cost from qualifying where a company is making a claim in the SME scheme. The company would however be able to include these staffing costs in a claim for RDEC. HMRC confirms they will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

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