Coronavirus Business Interruption Loan Scheme Compromises R&D Tax Credits

24th March 2020

We are living in unprecedented times, with governments around the world racing to inject fiscal and monetary assistance into their respective economies.

The UK Government is no exception, with a raft of measures announced in the Budget on 11 March and subsequently; measures that are without parallel in the history of our country.

One such measure is the Coronavirus Business Interruption Loan Scheme, or ‘CBILS’. It provides for up to £5m of funding for smaller businesses who are seeing their revenues wiped out by the pandemic.  In addition to facilitating funding, the scheme benefits from lower initial repayments and no upfront fees.

State Aid

So far so good.  As you would expect, CBILS represents ‘State-aid’.

Per the EU Commission definition, ‘State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.’  CBILS dwarfs the €200,000 de minimis, meaning as a state aid measure it has to be ‘notified’ to the EU Commission with the hope that it will be approved and not declared unlawful.  

But it can take over a year to agree such a measure with the EU.  Here again, there is more good news.

The EU Commission’s Temporary Framework for State Aid Measures provides a mechanism where European states can pretty much ‘aid first, ask questions later’ when they are in the midst of an economic crisis.

Research & Development Tax Credit

It is unlikely many businesses were worrying about whether CBILS was state aid, or even lawful state aid. The problem, however, is that it is state aid.  And this could very well present a problem for those businesses accessing another facility that can provide badly needed cashflow - the incredibly lucrative Research & Development Tax Credit (“RDTC”) regime.

In simple terms RDTC can generate 25p in the £1 for every £1 of qualifying spend on qualifying RDTC projects – i.e. companies executing projects with innovation at their heart.  

For loss making companies this becomes a cash injection of circa 33p.

RDTC is itself deemed akin to state aid, and its presence in our tax legislation (and any changes thereto) has to be approved by the EU.  One of the conditions for its approval is that any project benefitting from notified state aid funding cannot also qualify for RDTC.

Let’s assume we have a business with a December year-end. It accesses a £250,000 CBILS loan in its year ended 31 December 2019.  During the period it has spent £1million on qualifying RDTC expenditure.  The business would have been expecting to qualify for a £250,000 injection via RDTC – and one it wouldn’t have to pay back.  It is highly likely the project would have continued into next year – generating more tax credits.

Enter stage left the notified state aid CBILS loan.  If that loan funds the project costs, in full or in part, then arguably the project no longer qualifies under RDTC.  The £250,000 tax credit is lost – as is all future RDTC for that project in future years…and the company now has a loan which it has to pay back.  The project would still attract relief under the Research & Development Enhanced Credit (“RDEC”) Regime, but this is a lot less lucrative at circa 10p in the £1, and with certain heads of expenditure excluded such as sub-contractor costs.

This would not have been the intention of HM Treasury when it envisioned the CBILS arrangements, but instead the inevitable consequence of urgently deploying new public backed funding measures whilst we are still bound by the EU state aid rules, in the midst of economic armageddon – or rather, coronaggedon.

What should businesses do?

So, what should businesses do?

If a business urgently needs cash then the answer is simple – try and secure CBILS funding and look to access as many of the other HMGovernment initiatives as possible (details of which can be found on our Corona Knowledge Hub).  

It is better to have a business that can execute projects in the future, than become insolvent as a result of a lack of engagement with measures such as CBILS due to fears over RDTC.  But it must make sure it submits a claim to RDEC.

Business must know their RDTC numbers – i.e. the level of RDTC at stake, so you can plan for these. Don’t assume you will benefit from RDTC when forecasting your cashflow for the purposes of a CBILS application.

Our view is that HM Treasury did not intend for this to be a problem.  We have lobbied HM Government on this issue and asked for the Treasury to release a statement giving clarity on this matter – both for RDTC, and for other regimes such as EIS and Seed EIS.

Capitalise scheme

Bishop Fleming has a team of fundraising specialists ready to advise clients through Coronavirus. As a partner of Capitalise, we have access to 100+ lenders to provide businesses with the opportunity to secure the right kind of funding. Our Capitalise team will support you through all stages of the funding process.

Find out more about raising finance through Capitalise here.


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