Research & Development - The impact of COVID-19

Research and Development (“R&D”) tax relief provides innovative businesses with a valuable tax incentive where work 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.

With all the uncertainty and financial concerns facing businesses, 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 cashback for a company, either by producing a refund of tax already paid or through the “selling” of R&D losses to HMRC for a 14.5% cash credit.

Where a profitable company has yet to settle its current year corporation tax liability with HMRC, 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 2020 will need to submit its claim before the end of December 2022.

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.

The government implemented a number of measures to help businesses during the pandemic including the Job Retention Scheme (“JRS”) and Flexible Furlough Scheme (“FFS”).

The JRS and FFS enabled employers to effectively “lay staff off” (furlough staff) but to keep paying them at least some of their wages whilst not working. The grant claimed by the employer to cover the reduced wages were taxable income of the business, in effect offsetting the allowable business deduction for the staff costs paid.

Where R&D staff have therefore been furloughed, their total working time will be lower which will limit the time they were available to spend on R&D activities, likely resulting in a lower staff cost being included in the total claim.

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.

The government set up various packages to support small and medium-sized businesses during the economic crisis.

When deciding whether an R&D project is eligible for SME or RDEC relief, the receipt of grants and subsidies needs to be considered. Where this income is notified of 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.

Funding through the Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business Loan Scheme and Bounce Back Loans have been confirmed by HMRC as being notified state aid, meaning that the receipt of this funding could prevent a claim for SME relief. HMRC would however 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.

It will therefore be important to determine why such income was received, where applicable.

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 and as a result of the pandemic 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.

If you think your company may have carried out R&D and is looking to make a claim, or if you would like to discuss any of the issues raised, please get in touch.