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  • SME relief for R&D - impact of a Coronavirus Business Interruption Loan
Article:

SME relief for R&D - impact of a Coronavirus Business Interruption Loan

21 May 2020

Growing companies that claim government support for their R&D work will be aware that it is classed at ‘State Aid’ under EU rules. However, they may well wish to claim further support from the Government during the COVID-19 outbreak: this could affect R&D claims they were expecting to make this year.  

Notified State Aid

Both the SME R&D tax relief scheme and the new Coronavirus Business Interruption Loan scheme (CBILS) are classified as Notified State Aid. While the SME scheme falls within the existing state aid rules, CBILS falls with the ‘Temporary Framework’: both schemes have their own overall limits in terms of how much a company can receive from the Government.

Although it is possible to claim Notified State Aid under both the existing rules and the Temporary Framework, there are specific rules that affect R&D claims. Under EU law and the UK’s Corporation Tax Act 2009, an R&D project may only have one source of Notified State Aid. Therefore, any R&D project that is even partly funded by CBILS will be ineligible for the SME R&D tax relief scheme - though it would be eligible for the less generous R&D Expenditure Credit (RDEC) scheme, which applies to large companies (RDEC is not deemed notified state aid under EU rules due to its less generous reward).

In addition, where companies have previously claimed R&D tax credits under the SME regime, they may potentially be unable to apply for the amount they want through CBILS. A restriction may apply where a company has previously claimed more €200k euros under the SME R&D regime in the previous three years. 

What will the CBILS money be used for?

Under normal circumstances, where Notified State Aid has not been ring-fenced and allocated to fund a particular expense or project, HMRC will assume it is apportioned out to all expenses and projects on a ‘just and reasonable’ basis. Therefore, this can make all qualifying R&D projects undertaken by a company ineligible for a SME tax relief claim.

In light of this, HMRC recently issued the following statement:

“The Government has notified CBILS as a State aid under the European Commission’s new Temporary Framework for COVID-19. The measure is a fully notified aid, so the restriction on receipt of other State aid (s1138(1)(a) CTA 2009) potentially applies, if the CBILS relates specifically to the company’s R&D expenditure [on a project] rather than being intended more generally to support the company. This will depend on the facts.”

From this statement it appears HMRC is taking the view that where a company is claiming under CBILS for general business support it should not necessarily preclude making R&D claims under the SME scheme. However, if a CBILS application relates directly to R&D projects it will result in those projects failing to qualify under the SME scheme.

The benefits of a clear audit trail

Obviously, at this point in time, many businesses will need to obtain finance regardless of the impact on other arrangements just to keep going. However, wherever possible, and ideally in the CBILS application and also in any board minutes in respect of their application, we would recommend that companies state that the CBILS money is to be used for general business support and will not be used to finance specific R&D activities. If a business is particularly worried about this they could also look to take a further measure of keeping CBILS money ring-fenced in company bank accounts in order to demonstrate that none of its use was on R&D activities.

Of course, if all you do is R&D or you are borrowing to directly support an ongoing R&D project, you will not be able to claim through the SME scheme – so let’s consider what the financial implications will be.  

R&D Expenditure Credit v the SME scheme.

Where an R&D project is ineligible for the SME tax relief scheme, relief may be claimed under the RDEC: it is not considered Notified State Aid and so can be claimed without impact from or on CBILS borrowing.

Under the SME scheme a 130% additional deduction is given on qualifying R&D expenditure when calculating taxable profits. For profit making companies this reduces the tax liability. For loss making companies the losses caused by the 130% additional deduction and the R&D expenditure may be surrendered for a 14.5% credit (capped at the total losses).

The RDEC is less generous: it is a taxable, ‘above the line’ 13% credit which is used to pay the company’s tax liability or can be claimed as cash where the company is loss making. When claiming RDEC as cash, the notional tax is withheld and so the net benefit is the same regardless of whether a company is tax paying or not.

The following table compares the financial effect of the SME and RDEC schemes, assuming a qualifying expenditure of £100,000

 

No R&D Claim (£)

SME – Profit Making (£)

SME – Loss Making (£)

RDEC (£)

Profit / (loss) before tax

1,000,000

1,000,000

(500,000)

1,000,000

SME deduction at 130% on £100,000

-

(130,000)

(130,000)

-

RDEC at 13% on £100,000

-

-

-

13,000

Adjusted profit / (loss) before tax

1,000,000

870,000

(630,000)

1,013,000

Tax at 19%

190,000

165,300

Nil

192,280

Tax liability after RDEC payment

190,000

165,300

Nil

179,280

Tax saving / 14.5% credit

24,700

33,350*

10,720

* £230,000 of losses have been surrendered for this credit, which now cannot be used to offset profits in future periods. Remaining losses are £400,000.

As you can see, the benefit generated by the RDEC claim is only 30%-40% of the SME benefit, depending on whether the business is profit or loss making.

Please note that where a company is deemed to have used CBILS on their R&D projects, the RDEC status of that project will apply to the life of that R&D project and not just the period in which the CBILS money was received. This could, therefore, result in reduced claims for a company for a number of years where an R&D project is ongoing for a significant length of time.

Small Business Support Grants

Businesses operating from premises with a low rateable value, you may be entitled to a direct grant from your local authority of £10,000 (or £25,000 for businesses in the retail, hospitality and leisure sectors). Effectively, unless all your business does is R&D, this should not directly affect claims for R&D relief under the SME scheme as both types of grant can fall within the EU state aid Temporary Framework.

For help and advice on the impact of funding on your R&D claim please get in touch with your usual BDO contact.