SUPPORT MEASURES PUTTING SME R&D TAX RELIEF AT RISK

Certain measures designed to offer a lifeline to Small and Medium-sized entities (SME)’s, have now been classed as Notifiable State Aid (NSA) under the European Commission’s new Temporary Framework for COVID-19.

• Coronavirus Business Interruption Loan Scheme (CBILS)
• Bounce Back Loan Scheme (BBLS)
• Retail, Hospitality & Leisure Grant Fund (RHLGF)

If a company receives support from any of these schemes, then it will not be possible to claim SME R&D Tax Relief for that project as a company can only be in receipt of one form of NSA on any one R&D project.

The rules are applied on a project-by-project basis, and it can become complex. With appropriate loan application wording and suitable record keeping, it may still be possible to obtain financial assistance for your company without impacting on your R&D claims. Contact us for further advice.

The Government has now classed the Small Business Grant Fund (SBGF) as De-minimis State Aid. Where a loan or grant is labelled “de-minimis”, then only the subsidised amount which is used for the R&D project will not be claimable under the SME scheme.

HMRC’s view is that once support has been obtained, it cannot subsequently be repaid or reversed in order to benefit from R&D under the SME scheme. In other words, once it is processed and completed, the restrictions to the SME scheme apply.

Where an R&D claim has been jeopardised under the SME scheme, projects in receipt of notifiable and de-minimis state aid may, however, still qualify for Research and Development Expenditure Credit (RDEC) scheme, although the benefit under RDEC is significantly less.

Innovate UK Funding

Similar rules apply for Innovate UK funding. Innovate UK funding is given to companies which carry out R&D, and therefore the interaction with R&D tax credit claims can be complex. Up to £750m in grants and loans will be offered to SMEs carrying out R&D. Generally, Innovate UK funding is a Notifiable State aid. This means that receiving an Innovate UK grant for an R&D project means it is likely that project cannot be included in your SME R&D tax credit claim. However, you will be eligible to claim under RDEC on this project.

The rules are applied on a project-by-project basis, and it can become complex. For further information, please email your usual Relationship Partner or request a call back.

The following are understood not to be considered as State Aid, and should not impact your R&D claim

Payment deferrals of a general nature – Tax payment deferrals are considered to be outside the scope of the State Aid rules to the extent that they are not selectively applied. Time to Pay arrangements and VAT payment deferrals should therefore not be subject to staid aid rules.

Business rates relief – In response to the Coronavirus outbreak, the Government has announced an Expanded Retail Discount Scheme, providing 100% business rates reliefs to certain businesses in 2020/21, regardless of their rateable value. According to the UK Government’s guidance (as updated on 2 April 2020), this scheme is not a State Aid, given the impact of COVID-19 in the sectors receiving the relief.

Coronavirus Job Retention Scheme – As announced on 12 May 2020, the Coronavirus Job Retention Scheme (JRS) allows companies to “furlough” employees, and the government will pay 80% of the salaries (up to £2,500) of those workers.  The JRS is a wage subsidy which is in principle applicable to all companies, including non-UK companies which have UK employees and operate PAYE.

When an employee is on furlough, they will not be carrying out any work, and therefore will not be directly and actively engaged in R&D activities.

For claims where all or part of its accounting period falls after the announcement, it is likely that investment in R&D will be lower than prior claims.

The company is responsible for the accuracy of its claim. Input from the company’s competent professionals is essential to ensure a robust R&D tax credit claim is prepared. So, what if the competent professionals have been furloughed?

• Statutory directors on furlough can still carry out their statutory duties, including accounts and tax filings
• Check whether any other technical staff can step in to support the claim preparation.
• It is possible to prepare an estimated R&D claim if there are no available competent professionals in the business. The estimate should be as reasonable and accurate as possible. Once the competent professionals return to work, the estimated figures can be replaced with final figures. Please consult an R&D specialist to help with preparing an estimated claim.

IS MY BUSINESS ELIGIBLE FOR R&D TAX CREDITS DURING COVID-19?

R&D tax incentives remain a viable funding mechanism alongside all of the emergency funding measures outlined so far. The relief is a business incentive to support companies carrying out R&D with a cash injection. The Government’s view is that the ability for companies to access this credit will help the recovery of the economy. For every £1 given in relief, up to £2.35 of additional spend is stimulated back into the UK economy. Therefore, in order to claim the relief, the company has to be spending money on qualifying R&D projects.

In order to claim R&D tax relief, the company must be a going concern. It is important that you do not rely on the credit payment as the only means to remain solvent. This means you are unable to receive a credit if you are in liquidation or administration.

To help with cash flow needs, companies should consider which Government measures they are eligible for and how these may impact the status of the R&D claim.

WILL HMRC OFFSET AN R&D CLAIM AGAINST TAX ARREARS?

Prior to COVID-19, HMRC would routinely offset R&D claim payments against other tax arrears. The VAT deferral scheme now in place defers the VAT payment due date to the end of the 2020-21 tax year. As a result, deferred VAT payments in this period are not overdue and HMRC has confirmed that R&D claim payments will not be offset. However, it is worth understanding how the R&D legislation deals with other arrears.

For SME claims, the legislation allows a payable credit claim to be offset against any PAYE/NIC owed for the claim period. This means that credit payments should not be offset against any other arrears before being processed.

Under RDEC, step six requires HMRC to offset the RDEC payment against other liabilities with HMRC. This would include any PAYE/NIC or VAT payment which are overdue.

HAS COVID-19 IMPACTED HMRC’S PROCESSING TIMES?

Generally, HMRC have been proactive and sympathetic to the challenges being faced, and therefore understand the importance of ensuring payments reach companies quickly during this period. Additional resources have been set up to help manage processing R&D claims during this challenging period.

From our experience at Jeffreys Henry LLP, claims have been processed and paid out to the company within 28 days from submission. However, it is worth nothing that additional security checks are carried out on larger payments which may cause delay in the funds reaching the company. As part of our service, we closely monitor the processing times and keep our clients informed with the progress of their R&D claim.