How COVID-19 Loans can affect Research and Development Tax Credits

There is no doubt that there will be a lasting legacy of the measures introduced to fight the Coronavirus pandemic and this article highlights the impact of the UK financial assistance on future R&D claims.

Dated: 27 April 2020 Author: Adam Longmore, Corporate Tax Director

The UK Government have taken extraordinary steps in an attempt to assist UK companies throughout the significant disruption being experienced.

The assistance has taken the form of:

• Business grants to small businesses and many retail, hospitality and leisure businesses
• Coronavirus Business Interruption Loan Scheme ‘CBILS’ which offers government assisted loans for SME’s of up to £5m
• Self-Employment Income Support Scheme
• Job Retention Scheme

More details on all of the above can be found on our Covid 19 hub.

Since its announcement CBILS has been significantly expanded with changes to the scheme’s features and eligibility criteria. These changes mean even more smaller businesses across the UK, impacted by the coronavirus crisis, can access the targeted funding.

The measures are intended to encourage more lending and we have now assisted a number of our clients through the application process with great success. Whilst commercial factors and the immediate need to survive will form the decision to apply under CBILS, we are identifying some future impacts that may need to also be considered.

R&D tax credits

We assist many clients with their R&D tax credit claims, a tax incentive to invest in R&D. The size of R&D credits available to companies relates to the size of business, with a Small and Medium Enterprise ‘SME’ scheme* and Large company scheme in operation:

*SME - fewer than 500 employees and either an annual turnover not exceeding €100m or a balance sheet not exceeding €86m.

• The SME regime gives relief for R&D activities at 230%, providing corporation tax savings or payable credits of up to £437 for every £1,000 of qualifying expenditure.
• Large companies claim R&D Expenditure Credits (‘RDEC’). These provide a lower rate of relief up to 10.53% of qualifying R&D expenditure.

How could CBILS impact on R&D?

The R&D regime in the UK is generous, so much so that the scheme is already a form of notified state aid. Under state aid rules, no more than one form of notified state aid can generally be received by a company. 

It has always been the case that where a company qualifies for SME R&D tax credits but has received grants and/or subsidies there can be a restriction on the relief available.

The position is, however, even more extreme where the grant/subsidy received is ‘notified’ state aid and relates to the R&D activity as it will no longer qualify under the SME scheme. 

HMRC have recently confirmed that CBILS will be classified as ‘fully notified state aid’. In addition, this will mean that where the CBILS relates specifically to the company’s R&D expenditure on a project (rather than being used more generally to support the company) there is a risk that all of the expenditure on the R&D project is excluded from future tax credit claims under the SME scheme.

If this is the case, the R&D relief to be achieved will be significantly impacted leading to a direct impact on future cashflow.

Where a company has therefore claimed assistance under CBILS there is a real possibility that SME’s will find the cashflow benefit of their claims is restricted or even eliminated in future.

Planning is key

To reduce the impact, the application should ensure the funds raised are targeted for specific areas of the business. In particular we would be attempting to ring fence the R&D activities, these actions minimise the chances that the CBILS assistance is inadvertently linked with the R&D project. Whilst this may fall with us as your R&D advisor, it may also be an important consideration for the application under CBILS.

Of course, there will be activities undertaken by companies that are more general and cannot be separately distinguished from day to day trading operations. In this case a restriction looks more likely to be encountered. To limit the impact for clients more dependent on the R&D incentives,  it may be appropriate to shorten the year end to ensure claims up to the date of the CBILS are unaffected.

The application of the rules by HMRC are yet to be seen in practice but some actions, as above can minimise the risk that the SME rates of relief are unavailable.

Need assistance?

We are assisting a range of companies to accelerate their claims and even revisiting previous claims to ensure all qualifying costs have been captured.

If you would like to discuss your previous or future R&D claims with us, please do not hesitate to get in touch by calling us on 0845 555 8844 or completing our enquiry form and we will get back to you.