Many companies have benefitted from UK Government support schemes introduced following the coronavirus outbreak in March 2020. Such support received under these schemes can, however, impact research and development claims for innovative SME companies.
The UK’s R&D regime for SMEs enables qualifying companies to achieve enhanced corporation tax deductions on qualifying expenditure and for loss making SME companies, claims can result in cash repayments where tax losses are surrendered.
Claims made under the UK R&D regime for SMEs are classed as ‘notified state aid’. Under EU rules, companies are not allowed to receive state aid twice on the same development project. Some of the UK Government coronavirus support schemes are also classed as state aid, which can cause a problem for companies which ordinarily are eligible to make R&D claims under the SME scheme.
Here we consider the impact on R&D claims of some of the most common COVID support schemes. In some scenarios, the negative impact on R&D claims could be significantly disproportionate to the value of the support received.
BBLs of up to £50,000 were available up until 31 March 2021 for qualifying small businesses meeting specific criteria. Under the loan scheme the UK Government paid the first 12 months of loan interest from the issue date of the loan.
A BBL is classed as ‘de minimis’ state aid, therefore, where funds derived from a BBL have been used to directly fund R&D activities (or were accessed with that intention), this would disqualify the relevant BBL funded R&D expenditure from the SME scheme. The remaining project costs which were not funded by the BBL can remain in the SME scheme claim, and the BBL funded expenditure can be claimed under the less generous large company scheme (the RDEC).
CBILs of up to £5 million were available up until 31 March 2021 for qualifying small and medium-sized businesses. Under the loan scheme the UK Government paid the first 12 months of loan interest from the issue date of the loan.
CBILs are classed as ‘notified’ state aid. Where funds derived from a CBIL were accessed with the intention of directly funding R&D activities, this would disqualify the relevant R&D project from the SME scheme. The entire project expenditure is disqualified – not just the amount which is CBILs funded.
The qualifying project costs could instead be claimed under the RDEC scheme.
SMEs making R&D claims who have received BBLs or CBILs will need to pay careful attention to the purpose and use of the funds received, and their impact on the R&D claims being made.
Qualifying SMEs have been able to reclaim up to two weeks of statutory sick pay (SSP) from HMRC where an employee has been forced to isolate, and therefore unable to work, due to coronavirus.
Rebates under the CSSPRS are classed as ‘notified’ state aid, therefore where SSP has been reclaimed in relation to an employee who was involved in a qualifying R&D project around the time of the absence, the whole project will be disqualified from the SME scheme.
R&D claims on the relevant project would still be eligible to be made instead under the RDEC scheme.
CJRS has enabled qualifying employers to reclaim up to 80% of the wages (subject to a cap of £2,500 per month) of employees who are furloughed. The rates of employer contributions have varied since the launch of the scheme in April 2020.
It goes without saying that an employee whilst furloughed would be unable to carry out qualifying R&D activities, so employee costs whilst on furlough would need to be excluded from any R&D claim. There are some additional complexities when considering holiday pay and sickness pay during an employee’s furloughed period and the proportionate attribution of these costs to the employment cost used in the R&D claim.
Fortunately, CJRS is not state aid, so receipt of CJRS support does not disqualify entire projects from the R&D SME scheme.
If your business has received support under one of the Government’s coronavirus support schemes and you are intending to make a claim under the SME R&D regime then you should assess the impact on your R&D claim, as there may be a risk that specific expenditure, or even worse whole projects, could be disqualified from the very beneficial SME R&D scheme. Instead, the expenditure or projects may only be eligible for the less generous RDEC scheme.
To discuss your R&D claim needs please speak to Emma Reynolds, Simon Crookston or Stuart Weekes.
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