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:
Say R&D costs are £200,000 and the taxable profit is £120,000:
|RDEC (£13% x £200,000)||26,000|
|Revised taxable profit||146,000|
|Corporation tax @ 19%||27,740|
|Reduced corporation tax payable||1,740|
- 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.
- If the above calculation produces a loss, there is a 7-step process to work through to see what repayment a company could receive.
- 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.
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.