What is the impact of R&D claims involving furloughed employees?
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:
- Claims should always reflect furlough periods.
- 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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