Research & Development tax relief during COVID-19
Before the pandemic, Research & Development (R&D) tax relief was a useful way for businesses to get support from the government to spearhead new initiatives and innovations in their business. However, now that many companies have made use of the government’s support systems during the COVID-19 crisis, whether a company can also make the most of R&D tax credits has been thrown into doubt.
The impact of financial support during the pandemic
In response to the coronavirus pandemic, the government has provided a variety of options for businesses over the past few months and as we look to the future, including:
- Small business grants of up to £10,000;
- Grant funding of up to £25,000; and
- The Coronavirus Business Interruption Loan Scheme (CBILS), with loans up to £5 million for SMEs.
CBILS has offered a lifeline for SMEs which have had difficulties with cash flow during this time, enabling them to access bank loans that the government will cover the low level interest and lenders fees on for 12 months.
This has been extremely useful for some businesses across the country in the short term. In the longer term, businesses that have chosen to make the most of CBILS might find that their overall cash flow has been affected if they are wanting to claim R&D tax credits under the SME scheme.
R&D tax credits
R&D tax credits are a tax incentive that companies undertaking qualifying research and development activities can claim. There are two arms to R&D tax credits, these are:
- SME regime: corporation tax savings or refunds of between 24.7-33.3% of qualifying expenditure on R&D projects.
- Large companies: Claiming R&D Expenditure Credits (RDEC) to create a tax credit of up to 9.72% of qualifying R&D expenditure.
Before COVID-19, R&D tax credits were a great way for companies which were working on innovative projects to be rewarded for investing in the future. They were, and still are, a valuable source of cash for businesses to invest in growth, hiring new employees and accelerating key projects.
Now, R&D tax credits have been a useful way for businesses to access cash during a time when they are struggling.
What does this mean for your business?
The government’s schemes, including CBILS, potentially impact a company’s ability to claim under the SME R&D tax credit scheme. This is because if a business has received a grant or subsidy that is classed as Notified State Aid (NSA) this results in the exclusion of the relevant project expenditure from the SME scheme as technically the SME R&D tax credit is itself a form of NSA.
A company can only use one form of NSA for a project, and HM Revenue & Customs has already confirmed that CBILS will be classified as a NSA. HMRC has also confirmed that this could mean that if a business has accessed CBILS in relation to specific R&D expenditure on a project instead of general business support, there is a chance that the expenditure on the project will be excluded from future tax credit claims. Ultimately, this will negatively impact on cash flow for the long term.
If you’ve claimed a generous SME R&D tax credit relief in the past and have accessed CBILS to support your business during the pandemic, you may find that you’re unable to claim this in the future.
However, a company in receipt of NSA for a project can still make a claim under the R&D expenditure credit (‘RDEC’) scheme, which is usually for large companies. In addition, companies can also claim for qualifying R&D costs funded by the grant. This is because there is no provision under the large company RDEC scheme to prevent subsidised expenditure from qualifying for R&D tax relief.
What can you do?
Although lockdown is slowly easing, there will still be a view that short term cash injections may take precedence over long term financial planning. So if your business is in need of funding in order to survive the pandemic, we’re here to help.
It is important to assess the impact of any funding that you apply for, and the best way to go about this to ensure you won’t lose out in the future, especially if your business undertakes R&D projects. The situation is ever changing, so speak to one of our R&D tax credit experts to get the most up to date advice on how your business can remain viable now and in the future.