How do grants affect R&D tax relief in the COVID-19 era?
The interaction between grants and R&D tax relief is always a bit tricky to work out, and is something we’ve covered at length before. We’ve also written about how all of the COVID-related financial support, including furlough payments, given to companies affects a claim for R&D tax relief. However, in this era of virus-related uncertainties, we thought it would be helpful to bring all of this together and discuss how advisors can navigate these tricky waters for their clients.
Grants & R&D
A quick reminder: the reason that grants and SME R&D tax relief interact is down to European Commission rules around State Aid. Because the SME R&D tax relief scheme is so generous, it is classed as a notified state aid. All other grants can be divided in to two types:
Notified State Aid, and everything else (including de minimis State Aid). To help prevent Governments over-subsidising their own companies, there is a rule that no project within Europe can be in receipt of more than one form of Notified State Aid.
Taking these facts together with the guidance around R&D tax relief, we come up with three golden rules:
- You can’t use more than one form of Notified State Aid on a project. This means that if your project has already received State Aid, you can’t apply for R&D tax credits under the SME scheme.
- You can claim for State Aid-funded projects through the RDEC scheme. If you are an SME with a State Aid-funded R&D project, you can normally claim relief under RDEC – which unlike the SME scheme is not a form of Notified State Aid. It doesn’t matter what percentage of the project has been funded by State Aid – all of its expenditure is affected!
- Non-notified State Aid grants split a project into SME & RDEC components. If you’re an SME with a project funded by something other than notified state aid, you can claim the non-subsidised portion through the SME scheme as usual, and only the amount of the subsidy has to be routed through RDEC.
CBILS & BBLS
Both the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) have been classified as Notified State Aid. This means that:
If you’ve been claiming SME R&D tax credits, you won’t be allowed to use CBILS/BBLS finance to support any project that has received SME R&D tax relief.
- If you haven’t been claiming for SME R&D tax credits yet, any project that you support using CBILS/BBLS won’t be eligible for SME R&D tax credits, either now or at any point in the future.
While the Coronavirus Job Retention Scheme (CJRS) is not classified as any type of State Aid, it nonetheless could have a big impact on R&D claims. Essentially, HMRC will not consider furloughed workers to have been directly or actively engaged in R&D during the time they were on furlough, and so this time, and the furlough payments, will have to be excluded from future R&D claims.
What does this all mean?
Well, what this really means is that R&D claims for companies that have received grants and/or any form of Coronavirus financial support are going to be more complicated for at least the next couple of years. What do we mean by complicated? Here’s an example scenario for you to chew over:
TechCompany A, an SME, has been working on an innovation project for the past couple of years, for which it has received grant funding from Innovate UK. It also carries out eligible R&D at its own expense. When the COVID lockdown was announced, the company was forced to furlough some of its project staff, and took out a bounce-back loan to cover some of its ongoing costs. What do they need to consider, and what will their FY2020 R&D tax claim look like?
Well, first of all they’ll need to make sure that they don’t use any of the BBLS funding to pay for the grant funded project, so as not to fall foul of State Aid rules. They may also want to look at extending their grant if they’ve fallen behind due to furlough.
In terms of the R&D claim, what they will need to do is:
- Look at which project staff were furloughed, and exclude any furlough (and top up salary) payments made to those staff while they were on furlough from the R&D claim
- Separate out eligible spending on the grant funded project and route that through RDEC
- Assess which, if any, other R&D projects were funded by the bounce back loan
- For the projects that did receive BBLS funding, route the eligible spend through RDEC
- For the remaining projects, route the eligible spend through the SME scheme
Phew! If this looks complicated, it’s because it is—the COVID-19 situation has injected an extra layer of complexity into what was already a tricky area of tax.
Brush up on the fundamentals of the R&D tax relief scheme
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