Covid-19 spotlights research and development (R&D). Funding initiatives like the Fast Start Competition, managed by Innovate UK, have recently been available for break-through projects in science and technology. Companies involved in R&D may also be eligible for support such as the Coronavirus Business Interruption Loan Scheme (CBILS) and the Future Fund. But how do these measures fit in the context of the R&D tax incentives available for companies generally?
There are two main types of R&D tax relief, with availability largely dependent on the size of the company. Small and medium sized enterprise (SME) R&D relief provides an enhanced 230% deduction from taxable profits for qualifying R&D expenditure. Where an R&D claim creates a loss, it may be possible to surrender this for a cash repayment, currently 14.5%, a valuable boost to cash flow in current circumstances. Research and Development Expenditure Credit (RDEC) is another valuable relief, available both to large companies, and SMEs not meeting the criteria for the SME R&D scheme. It is now worth 13% of qualifying R&D expenditure.
Covid-19 creates a number of issues for R&D claims:
- deadlines: claims should normally be with HMRC within 12 months of the statutory filing date of the company's tax return. Where this is not possible in current circumstances, HMRC advises that it may be able to consider late claims.
- State aid: government Covid-19 support qualifying as State aid, such as CBILS, could impact eligibility for SME R&D relief, which also sits within State aid rules. CBILS funds channelled specifically towards R&D costs, for instance, rather than being used to support the company more widely, could prejudice such a claim.
- other tax liabilities: R&D repayment claims may not be paid in full where there are other outstanding tax liabilities, unless covered by Covid-19 VAT deferral measures. Otherwise, HMRC will offset RDEC repayments against other tax liabilities, including those owing under a Time To Pay agreement. It is also likely to offset payment of a credit under the SME scheme against a tax liability, though it has more discretion here and will consider individual circumstances if requested.
- going concern: to claim the tax credit for a surrenderable loss, it is a statutory requirement that a company is a going concern according to the last published accounts. For many claims, the underlying accounts will have been prepared before the pandemic, so this should not present a problem. But going forwards, this will need appraisal and HMRC advises getting in touch where there are difficulties.
Please do contact us for advice on the complexities of R&D.