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COVID-19 support and R&D tax credits. Unintended consequences?

Stuart Weekes, Partner, Corporate Tax
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How many companies, when facing financial uncertainty turn down the opportunity for financial support?

Over the past 18 months or so a number of companies have faced financial uncertainty. When COVID-19 started to impact the UK and the government imposed the first lockdown many companies and their owners had to urgently consider their strategy.

Some had the ability and opportunity to adapt to the challenges faced. Through internal innovation and collaboration with others these companies were able to thrive and grow. Others struggled, facing uncertainty about whether their businesses would be able to survive in the months ahead.

Government financial support

The government provided financial support and this was welcomed by companies.  The ability to put employees on paid furlough leave and claim financial support through the coronavirus job retention scheme (CJRS) meant that those companies didn’t have to undertake rounds of redundancies. They could also claim government backed loans with preferential interest terms. Whilst finance institutions typically did not alter their lending criteria, i.e. the company still had to be viable, this did provide some security to the lenders and aid the cashflow planning of the companies concerned.

Those companies eagerly claimed the financial aid because it was needed at that time to help them with genuine uncertainty about the road ahead.

R&D tax credits are valuable

Many companies make claims for research and development (R&D) tax credits. These can provide a company that meets the conditions for the SME scheme with an additional benefit of around 25% of their expenditure on qualifying R&D or 10.5% for companies that qualify for R&D Expenditure Credits (RDEC).

They therefore provide valuable benefits for companies and according to the government comprise one of the best global R&D tax incentive schemes.

Impact of government support on R&D claims

However, the benefits of the SME scheme are restricted where the company claims other reliefs. Where an SME claims a grant or subsidy this reduces the costs that are eligible for the SME relief. Usually the costs covered by the grant are available for relief under the RDEC scheme but the benefit of that is lower and care is needed as qualifying conditions for RDEC are subtly different to those of the SME scheme.

The larger concern is where a company claims financial support that is considered to be Notified State Aid (NSA). Where the company receives this support in relation to a project none of the costs of that project qualify for tax credits under the SME scheme; some relief may then be available within the RDEC scheme.

Some of the COVID-19 financial support is NSA and therefore companies that have claimed this support will need to consider if that means that their projects won’t benefit from the SME tax credits. Examples include CBILs and BBILs loans where those were obtained in relation to one or more R&D projects. However, this also applies to companies that claimed the Coronavirus Statutory Sick Pay Rebate scheme (CSSPR). A company could claim this where an employee took sick leave because of the coronavirus.

As a result, a company might have claimed the relief available at the time but not known that it limited its ability to claim the higher relief through the R&D tax credit schemes.

The problem is that, while the company could decide to repay the COVID-19 support, the tax rules would still treat the company as having claimed the support, therefore continuing to taint the R&D projects.

Companies facing this problem could review the affected R&D project and consider whether it is possible to sub-divide that into smaller projects so that the COVID support only taints the sub-divided project and not others.

Looking forward

It is clear that we have learned a lot over the past 18 months, some to our advantage, others forming traps for the unwary. Care does need to be taken when making claims for R&D tax credits that companies do not overclaim and do take into account any financial support received by the government in response to COVID-19.

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Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley