How Coronavirus Business Interruption Loan Scheme impacts R&D Tax Credits and what you can do about it
And as the UK has gone into near total-lock down, there are a number of problems heading down the track.
One such measure is the Coronavirus Business Interruption Loan Scheme, or ‘CBILS’. It provides for up to £5m of funding for smaller businesses who are seeing their revenues wiped out by the pandemic. In addition to facilitating funding, the scheme benefits from lower initial repayments and no upfront fees.
CBILS represents ‘State-aid’. State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. CBILS dwarfs the €200,000 de minimis, meaning as a state aid measure it has to be ‘notified’ to the EU Commission with the hope that it will be approved and not declared unlawful.
R&D Tax Credit
It is unlikely many businesses were worrying about whether CBILS was state aid, or even lawful state aid. The problem, however, is that it is state aid.
And this could very well present a problem for those businesses accessing another facility that can provide badly needed cashflow such as Research & Development Tax Credits.
In simple terms R&D Tax Credits:
- Can generate 25p in the £1 for every £1 of qualifying spend on qualifying projects – i.e. companies executing projects with innovation at their heart.
- For loss making companies this becomes a cash injection of circa 33p.
R&D Tax Credits is itself deemed akin to state aid. One of the conditions for its approval is that any project benefiting from notified state aid funding cannot also qualify for R&D Tax Credits.
Let’s assume we have a business with a December year-end.
- It accesses a £250,000 CBILS loan in its year ended 31 December 2019.
- During the period it has spent £1million on qualifying R&D expenditure.
- The business would have been expecting to qualify for a £250,000 injection via R&D Tax Credits.
- It is highly likely the project would have continued into next year – generating more tax credits.
Now if the CBILS loan funds the project costs, in full or in part, then arguably the project no longer qualifies under R&D Tax Credits SME scheme (the more lucrative scheme).
The project would still attract relief under the Research & Development Enhanced Credit (“RDEC”) Regime, but this is a lot less lucrative at circa 10p in the £1, and with certain heads of expenditure excluded such as sub-contractor costs.
What should businesses do?
If a business urgently needs cash then the answer is simple – try and secure funding and look to access as many of the other HM Government initiatives as possible. But still submit a claim to HMRC, albeit under the less lucrative RDEC scheme.
But, if the solutions being offered by the Government so far aren’t suitable for your business, which may be because you are early-stage tech startup then consider bringing forward your financial year end and claiming R&D credits. Businesses must know their R&D numbers – i.e. the level of R&D tax cash at stake, so you can plan for these.
It's worth noting that the Coronavirus Business Interruption Loan Scheme may not even be an option. Even with Government loan guarantees - startup business models don’t lend themselves well to loans, since they are loss-making and often don’t qualify for loan financing but this doesn't mean you shouldn't try. There are also many sources of non state aid finance to consider such as credit cards, invoice finance and the Startup Loan scheme that could help with runway.
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We understand that there are a wide range of areas where support might be required - as we are tax pro's we can help with R&D tax credits so do feel free to get in touch.