For SMEs where research and development (R&D) takes place, there is an additional 130% relief that can be claimed on certain costs when calculating the company’s taxable profits. This is designed to encourage innovation within the UK.
However, a company can only have one type of Notified State Aid (NSA) applying to R&D costs.
What classes as state aid?
The main types of NSA are:
- Coronavirus Business Interruption Loan Scheme (CBILS)
- Bounce Back Loan Scheme (BBLS)
- Statutory Sick Pay Rebate Scheme (SSPRS)
- R&D scheme for SME’s
So, for example, if a company receives funds under the CBILS and these funds go towards costs that are directly involved with R&D activities, then the company can no longer claim under the R&D scheme for SME’s.
What about the furlough scheme?
The Coronavirus Job Retention Scheme CJRS (aka the furlough scheme) is not a NSA, however this is a subsidy so provided that these costs which have been subsidised are not included in the R&D claim, the company can still claim under the SME scheme. This makes sense, because if an employee is furloughed, they shouldn’t be working and therefore they cannot be engaged in R&D activities for that period.
If SSPRS, CBILS or BBLS have funded R&D projects
If a company has received SSPRS, CBILS or BBLS and the funds have gone towards R&D projects, the project will fall under the Research and Development Expenditure Credit (RDEC) scheme for large companies. This is instead of the SME scheme.
Note that where funds from government-backed loans are spent on R&D activities, it is the entire project that is caught and must follow the RDEC rules, rather than just the year that the funding was received. A project could last for a few years.
If a company has a SSPRS, CBILS or BBLS and they have not used the funds towards R&D projects, they will need to evidence that this is the case. Robust records are needed, board minutes etc to say exactly what the costs were – even with this, it is a risk area as HMRC may want to challenge!
HMRC are looking more closer at R&D claims, so this is certainly something to be aware of.
The RDEC scheme for R&D
Designed for large companies (more than 500 employees or an annual turnover of over €100m), RDEC is the large company equivalent for R&D tax credits. However, the relief is much less generous than for the SME scheme and with greater restrictions.
Instead of receiving an additional deduction like the SME scheme does (currently an extra 130%), the RDEC scheme works by taxing an additional sum equivalent to 13% (the current rate effecting from 1 April 2020)) of the R&D costs and this sum is then taken off the total tax liability. For example:
- The additional tax saving works out to be £10.53 for every £100 spent under RDEC compared to £24.70 for every £100 spent under the SME scheme.
- The higher the wages cost within the claim, the higher the tax credit that you could receive. Otherwise, the unused relief is carried forward to the next accounting period.
- For the SME scheme, 65% of the subcontracted cost could be taken account for the claim. Under RDEC, subcontracted costs are only allowed for:
- A qualifying body, such as a university, a scientific research organisation or a health service body, or
- An individual, or
- A partnership, each member of which is an individual
So company subcontractors would not be allowed.
More advice
If you have any questions about R&D tax reliefs or would like further advice, please contact us and our tax team will be happy to help you.