Innovation is key to the success of most businesses. The ability to adapt an idea and turn it into something that has commercial value to the business or has wider benefit is at the heart of innovation.
Most innovative companies take risks. There is a risk in choosing the right idea to develop further as it may not succeed; it may fail. A key risk is the allocation of resources on something that may not create an income stream.
R&D tax credits may be available in such situations. R&D tax credits are available to companies operating in the UK who seek to advance science and/or technology in situations where there is an uncertainty that someone competent in the field cannot easily resolve.
If eligible they can be a genuine benefit to companies that are taking the risk of investing in innovation. These credits are even available if the innovation fails and does not succeed.
Grants and subsidies are also available for such companies. Where the company claims a grant or subsidy this can limit the amount of benefit from the R&D tax credit schemes. There is often a decision to be made between claiming the grant/subsidy or the R&D tax credit.
There are two R&D tax credit schemes. The SME scheme is for companies which qualify as small or medium enterprises and have qualifying expenditure. The SME scheme is generally more generous. The Research and Development Expenditure Credit (RDEC) scheme is for larger companies or for SMEs when their expenditure does not qualify for the SME scheme.
Where a company claims R&D tax credits under the SME scheme the grant or subsidy usually restricts the SME claim; however, that company can then make a claim for the costs funded by grant to be a RDEC. If the grant or subsidy is classified as notified State Aid, none of the costs of the R&D project would be available for an SME claim. However, it may be possible to claim an RDEC credit.
Over the past 12 months or so many companies have been innovative. This is often because being innovative was a necessity to be able to survive in such challenging times. In other cases, companies have seen an opportunity to help a Society that was facing the most significant challenge for over a lifetime.
The UK government provided various levels of support to companies (and other businesses) during the pandemic to help them survive. Many eligible companies would have grabbed the opportunity eagerly, without necessarily considering the potential consequences.
Having provided the funding, the government subsequently announced that in many cases this funding constituted a grant or subsidy and as such, to the extent it was applied for R&D costs, this restricts the claim for R&D tax credits.
The Coronavirus Business Interruption Loan (CBIL) is an example of funding that is notified State Aid. This means that if that funding is used for a project that qualifies for R&D tax credits, that project will only be available for the RDEC rather than the more favourable SME scheme.
The Coronavirus Statutory Sick Pay Rebate Scheme (CSSPRS) is a sick pay scheme available for employers with up to 250 members of staff. The company can claim up to two weeks of statutory sick pay per employee. This is also a notified State Aid. As for CBIL if the cost relates to an R&D project, none of the costs of that project are available for R&D tax credits under the SME scheme.
Whilst the company will be able to claim costs following the rules of the RDEC scheme, the reality is that the RDEC is not as advantageous as the SME scheme. Statutory sick pay is generally a relatively small benefit and so the consequence of claiming the CSSPRS would therefore be to gain a small advantage with the sick pay but potentially lose out on the more beneficial SME R&D tax credit scheme.
Unfortunately, in HMRC’s view the tax rules will not permit a company to repay the CSSPRS to ‘enable’ it to make an SME R&D tax credit claim.
A valid approach would be to interrogate the R&D project in more detail to ascertain whether it can subdivide into smaller projects. If this is possible and the CSSPRS can be shown to relate only to one or more of the sub projects and not taint some of the other sub-projects this could be a way to ensure that the company is able to maximise its claim for R&D tax credits.
The Coronavirus Job Retention Scheme (CJRS) is available where an employee has been ‘furloughed’. Many employers have claimed the CJRS. It is considered to be a subsidy but not notified State Aid. As a result, companies that claim the CJRS are able to make a claim for R&D tax credits under the SME scheme (assuming all other conditions apply). However, the CJRS claim relating to R&D employees is deducted from the qualifying expenditure incurred in the year. Assuming conditions apply the blow is softened somewhat as those costs should then be available as an RDEC credit.
Since April 2021 companies have been able to apply for government guaranteed loans through the Recovery Loan Scheme (RLS). HMRC has confirmed that the RLS, whilst being notified State Aid, may only affect R&D tax credit claims for R&D activities that fall within the Northern Ireland Protocol. Otherwise claims for R&D tax credits under the SME scheme may be available even if the loan is applied towards the R&D expenditure.
So, a key message from this is to be aware that whilst these reliefs are and have been a lifeline to many companies, it is important to be aware of the conditions and wider implications of making claims.
While it is likely to be too late to wind back the clock and repay any of the COVID financial support it is important to take a look at each situation and determine how to maximise the benefit of the R&D tax credit schemes while also receiving COVID financial support.