Tax Talk: COVID-19 implications for R&D claims
For accounting periods ending after 28 February 2020, SMEs relying on cash tax credits need to check they are still eligible, and whether the amount they have accrued could be less than expected. There are also potential pitfalls for large companies to consider.
After fighting to stay solvent with COVID-19 funding and furlough payments, companies undertaking R&D activities now need to review the impact of having accepted government help.
Bounce Back Loans (BBL), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS) are all considered “notified State Aid”, which means that if they have been claimed by an SME, an R&D claim could be blocked. It will be essential to check whether any of this funding has been used in the company’s R&D activities, or whether it was used to prop up other areas of the business.
Thankfully HMRC has acknowledged that in many cases, government loan support will not trace directly to R&D activity, and so SME R&D relief may not be impacted. However, you should be prepared to prove this, even if any loan application did not specifically refer to an R&D purpose.
If you are, however, in the situation that loan support was directly obtained to continue your R&D function, all is not lost, as any SMEs no longer eligible to make a claim under the generous SME R&D scheme can instead make a claim for the R&D Expenditure Credit (RDEC).
Sadly, the reason why this is possible is because the RDEC is not considered generous enough to count as notified State Aid. For loss-making SMEs, claiming the RDEC will feel even less generous, as they will need to wait until they turn a profit to benefit from the reduction of that future corporation tax liability.
Companies of all sizes will need to review their staff costs for the period 1 March to 31 October 2020 and identify any changes to staff responsibilities. Any employees who typically carry out R&D activities full-time may have been redeployed to cover for redundant or furloughed colleagues and/or they might have been furloughed themselves under the Coronavirus Job Retention Scheme (CJRS).
Payments made to employees to whom CJRS claims relates will not be eligible to be brought into any R&D claim over that period, as furlough means that the individual(s) could not have been conducting R&D at that time. Companies will need to establish who was furloughed, for how long, and if they came back part-time under flexible furlough. As always, detailed timesheet records are preferable as they provide excellent supporting evidence for relevant staff costs. However, if this is unavailable, it would certainly be a good idea for the Competent Professionals (often the Chief Technology Officers in tech businesses) to start keeping a record of modified working patterns, and their updated best estimates of how much time to attribute to each employee’s time spent on R&D projects.
A final potential Covid-related trap is whether companies are still considered a going concern in light of all the uncertainty; this may require early discussions with the auditors. Not only should the accounts sent with the tax return support a going concern position, a company making an R&D claim must still be a going concern at the time of making the claim. As always, do remember that if a company is reliant on an R&D tax credit to stay afloat, it will never be considered a going concern.
After all these warnings, there does remain one silver lining…
The proposed PAYE cap that was due to restrict the amount of payable credit in any year to three times’ the company’s total payroll liability has been pushed back to at least 1 April 2021. Whilst eligible staff costs for periods after 28 February 2020 may have gone down due to the impact of coronavirus, for some companies (especially those outsourcing labour), the lack of an immediate cap may actually make them better off for 2020.
Do not wait until the tax return and R&D claim are being prepared to assess whether your company is impacted by any of these issues – you should act now.
Written by Shona Barker in our London office.