October 16, 2020
Article
WHAT IS RESEARCH AND DEVELOPMENT?
Research and Development (“R&D”) tax relief provides innovative businesses with a valuable tax incentive where works have been carried out on a project that seeks to achieve an advancement in the overall knowledge or capability in a field of science or technology.
The relief can be for capital or revenue costs but is only available to companies, with the rate of relief being dependent on whether the claim is being made under the small or medium sized company (SME) scheme or the R&D Expenditure Credit (RDEC) large company scheme.
HOW COULD R&D RELIEF HELP DURING COVID-19?
With all the uncertainty and financial concerns facing businesses at present, dealing with R&D claims for earlier years may not necessarily be a top priority. R&D is however a fantastic form of tax relief which can result in cash back for a company, either by producing a refund of tax already paid or through the surrender of R&D losses to HMRC for a 14.5% cash credit.
Where a profitable company has yet to pay HMRC for its current year corporation tax liability, the R&D claim will instead reduce the tax payment to be made to HMRC by the due date.
A company only has a two year window to deal with its R&D claims. For example, a company with a year end of 31 December 2018 will need to submit its claim before the end of December 2020.
We recommend you get in touch to ensure any R&D claims are dealt with as soon as possible. HMRC can then begin processing any repayment and/or your business can accurately pay only what is due by the payment deadline.
HOW COULD COVID-19 IMPACT A FUTURE RESEARCH AND DEVELOPMENT CLAIM?
The government has announced a number of measures to help businesses during the current crisis including the Job Retention Scheme (“JRS”) and Flexible Furlough Scheme (“FFS”).
The JRS and FFS enables employers to effectively “lay staff off” (furlough staff) but to keep paying them at least 80% of their wages whilst not working, capped at £2,500 per month, provided they remain employed throughout. A grant can then be claimed by the employer to cover these reduced wages, in addition to having all related employer’s NIC and basic auto enrolment pension contributions reimbursed up until 31 July 2020. Any grant received will be taxable income of the business, in effect offsetting the allowable business deduction for the staff costs paid.
One of the conditions of being able to claim the JRS grant for periods to 30 June 2020 was that furloughed staff were not able to do any work for the business (i.e. providing services or generating income). From 1 July, staff may be in and out of the workplace on a flexible arrangement, again limiting the amount of work they are doing. Where R&D staff have therefore been furloughed, their total R&D time spent in the current year will be lower, which will result in a lower staff cost being included in the total R&D claim. Ultimately the business will see a reduction in the overall R&D saving for the period.
Companies wanting to carry out R&D over the coming weeks and months should therefore carefully consider staffing, where there may be an opportunity to retain staff for R&D works where a business has capacity during the current climate. It will be important for a business to maintain accurate records of when staff members have been furloughed and when time has been spent working on R&D projects as this will enable the total R&D staff cost to be calculated accurately when quantifying the R&D claim at a later point.
WILL A CLAIM FOR A CORONAVIRUS BUSINESS INTERRUPTION LOAN SCHEME (CBILS) IMPACT R&D?
The government has set up the CBILS to support small and medium-sized businesses during the current economic crisis, with this income being notified state aid.
When deciding whether an R&D project is eligible for the SME or RDEC relief, the receipt of grants and subsidies needs to be considered. Where this income is notified state aid it will mean that the qualifying costs for the entire project will be excluded from the SME scheme and instead will only be claimable under RDEC. The RDEC benefit is currently just under 11% of the qualifying costs, compared with nearly 44% for SMEs.
It will be important to determine what the income support is being received in respect of, as where this is for a specific R&D project, the entire cost of the project will be subject to RDEC which is less generous and will result in a significant reduction in R&D relief for a business. Where CBILS are received to generally support the business rather than a specific R&D project however, a company may still be able to claim under the SME scheme, resulting in more R&D relief.
Directors will need to carefully consider the impact of any loan funding being received under CBILs to assess how this could impact a future claim.
WHAT IF A COMPANY IS NO LONGER A GOING CONCERN?
One of the criteria for a company to make an R&D claim is that it must be a going concern when the claim is made.
A company is a going concern so long as its last published accounts were prepared on a going concern basis and there was nothing in those accounts to indicate that they were only prepared on that basis because R&D relief was expected.
A company cannot be in administration or liquidation at the point of making a claim.
Unfortunately, during the current crisis many businesses may be facing an uncertain future and the company’s directors will need to carefully consider whether the next annual accounts should still be prepared on a going concern basis. Where this is not the case, a future R&D claim will not be possible.
CONTACT
If you think your company may have carried out R&D and are looking to make a claim, or if you would like to discuss any of issues raised, please contact AG Tax Consulting.
Kelly Di Notaro
Tracey Watts