The short answer is: The treatment of your R&D claim depends on the type of COVID-19 funding your company has received. With that being said, the UK R&D Tax Relief Scheme remains a highly valuable benefit for companies who invest in R&D, regardless of the type of support package received.
Below are the most common COVID-19 support schemes and the impact on your R&D Tax Credit claim (as things progress, we will be keeping this post up to date):
1. Coronavirus Statutory Sick Pay Rebate (SSPR)
The SSP Rebate (SSPR) scheme was implemented to support small and medium-sized business owners by allowing them to reclaim SSPR costs due to COVID-19 for up to 2 weeks per employee at a rate of £95/week.
R&D TAX CLAIM IMPACT: As it stands, the SSPR is a form of Notified State Aid and, therefore, WILL affect your R&D tax credit claim.
The R&D SME Tax Credit scheme is a form of notified state aid, and companies in receipt of this may not claim any other state aid due to state aid cumulation rules. In conclusion, if in receipt of SSPR, a company loses its eligibility for the SME scheme and must claim for the R&D project under the RDEC (large company) scheme. This may drastically reduce your potential benefit from 19-33% down to around 10%.
RECOMMENDATION: For companies heavily investing in R&D, at present, it may be best to avoid the SSPR state aid. At a low amount of £95/week per employee, for two weeks maximum, it does not compare to a decent SME scheme R&D claim at 19-33% of your investment.
If the rebate has already been claimed and where the boundaries of the R&D can be clearly defined, it may be possible to divide your R&D into multiple projects with those in receipt of SSPR, and those not in receipt.
This will give you the option to make a claim for some investment under the much more lucrative SME scheme.
While this also should not affect retrospective claims for projects occurring before your SSPR, due consideration should be taken for the length of your R&D project going forwards so as not to disqualify your claim from the SME scheme.
Refunding the SSPR, even if possible, does not alter the situation, as the rules say, if the SSPR “is, or has been obtained” then it will be treated as state aid received.
2. Coronavirus Job Retention Scheme (CJRS a.k.a.”Furlough Scheme”)
Under the furlough scheme, the government may pay 80% of wages up to a cap of £2,500 for hours not worked by the employee. The impact of the CJRS is mostly minimal, yet estimates suggest a staggering 2/3rds of all UK businesses have already taken advantage of the scheme, implying that its very likely that someone in your organisation has been furloughed.
R&D TAX CLAIM IMPACT: Furlough is a temporary leave of employment, and therefore, staff time spent on furlough may not be included in an R&D project claim.
If a large majority of your workforce has been furloughed for a significant duration of your accounting period, please see point 4 below.
RECOMMENDATION: If feasible, consider reducing furlough time for staff who typically have a higher percentage of time allotted to R&D, for example, CTO, Head of R&D, Lead Software Developer, or Lead Engineer in the company.
Similarly, for non-furloughed, highly technical directors who are more involved in R&D, increasing pension contributions can be a great way to maximise the claim while also being a highly tax-efficient way of extracting profits from the business.
3. Other Types of COVID Government Support
The pandemic has also seen a variety of additional central government and local council support packages on offer, from loans, Business Rates Relief and other forms of Notified State Aid, Subsidies and Grants.
R&D TAX CLAIM IMPACT: Other forms of COVID-19 state aid support packages are unlikely to be specific to your R&D project or your workforce, and therefore should not affect your claim. Loans such as the Coronavirus Bounce Back Loan and other tax relief schemes are not a form of aid and need not be considered.
RECOMMENDATION: Given the numerous types of notified state aid a company can receive and the variety of intended purposes for funding, the treatment of the subsidy in respect of an R&D tax claim must be considered on a case-by-case basis.
4. The PAYE Cap
To prevent abuse of the R&D tax relief scheme, the government introduced the “PAYE Cap” limiting SME R&D claims to £20,000 plus three times your “relevant expenditure on workers”. This PAYE cap will apply from 1st April 2021, and accounting periods that straddle this date with be subject to a pro-rata proportional split of costs.
R&D TAX CLAIM IMPACT: If your company has low staff costs and the R&D claim is predominantly subcontractors, agency workers, or materials, then the cap may apply (but only after 1st April 2021!).
RECOMMENDATION: Bear in mind the potential limit to an R&D claim when furloughing a significant proportion of your workforce. It may be beneficial to keep key R&D staff members at work during the length of an R&D project if feasible.
Are you still unsure if the COVID-19 support you’ve received will affect the eligibility of your R&D Tax claim? Or perhaps you’re looking for ways to maximise your future R&D tax claims and minimise the impact of ongoing COVID-19 support?
Our team of tax professionals are experts in R&D legislation and would be glad to offer guidance on your claim.
Peter Little, Specialist R&D Tax Consultant, Catax