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What is the impact of R&D claims involving furloughed employees?

Research and development (R&D) claims for tax relief can only be made by companies for qualifying costs, and one of the main such costs are the payroll costs of employees who are ‘directly or indirectly involved in qualifying activities’. It is therefore commonly assumed that the proportion of furloughed employee payroll costs incurred during furlough would simply be excluded from the claim. Unfortunately, it is not quite that simple…
The R&D tax relief scheme for SMEs (small and medium-sized enterprises) does not allow claims to be made for subsidised expenditures. Since the rules were implemented before the UK left the EU, projects that were subsidised by notified state aid under EU rules were entirely ineligible for R&D tax relief under the SME scheme.
Can costs covered by CJRS be claimed under the SME scheme?

Although the CJRS (Coronavirus Job Retention Scheme) is not a notified state aid, it does fall into the general ‘subsidy’ rules, meaning that costs covered by CJRS cannot be claimed under the SME scheme even if they did relate to individual employees’ working time.

Therefore it is likely that:

  • The relevant proportion of payroll costs for the period that an employee was furloughed should not be included as part of an R&D claim under either the SME scheme or the R&D expenditure credit (RDEC) regime. This applies to both the amounts met under the CJRS as well as any top ups in employee pay issued from the company itself since the employee in question could not have been carrying out any R&D activity whilst furloughed.
  • Companies can continue to include R&D tax relief claims as it remains a cost associated with their ‘working time’. For companies that have made CJRS claims, these amounts are considered subsidised. They are therefore only claimable under the RDEC scheme (not the SME scheme).
Key points for claimants

The two key points that claimants should bear in mind are:

  1. Claims should always reflect furlough periods.
  2. Claims for the sick pay / holiday pay elements, which remain eligible under RDEC, should always be included. Discretionary bonuses and overtime payments should be given special consideration. Depending on the relevant facts, there could be a valid argument in favour of the qualifying element of such payments not being affected by any time spent on furlough if said facts inherently relate to the individual employees’ working times.
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On the 23rd of April, 2021 at 11 am, our very own CEO Wesley Rashid and R&D Manager Anh Vu will be joined by Edo Salvesen, CFA and Director of Finstock Capital, to discuss everything you need to know about claiming R&D Tax Credits in - “Unlocking your R&D Potential”.

Attendees will be invited to join Anh for a complimentary 1-on-1 R&D clinic, don't miss it!

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