R&D tax reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that are carrying out R&D.
The SME relief allows small and medium-sized companies (SMEs) to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction and, if the company is loss making, claim a payable tax credit, worth up to 14.5% of the surrenderable loss. In summary, if the company is loss making, then it may be possible to obtain a cash payment from HMRC of 33.35% of the qualifying costs. This is called the R&D payable tax credit.
R&D tax relief and the COVID-19 pandemic
This has always been an important tax relief offered by the Government and is even more important during the COVID-19 pandemic as companies will be looking at various ways to maximise cash flow in these trying times. It is still possible to make an R&D tax relief claim during this crisis.
However, it is worth remembering that a company may only claim an R&D payable tax credit if it is a going concern at the time when the claim is made. A company is a going concern if its latest financial statements were prepared on a going concern basis, and nothing in the financial statements suggests that status depends on it receiving the expenditure credit.
Companies in administration or liquidation cannot make a claim but a company which comes out of administration can make a claim provided it is in time to do so.
Timing of refunds
HMRC continues to operate during the crisis with HMRC officers also working from home. However, with many workers either self-isolating or practicing social distancing, HMRC's team may not be operating at 100% capacity. There might be a slight increase in processing times as HMRC officers may work on other COVID-19 related matters, and so it is possible that there may be delays from the normal time frame of 4-6 weeks to get the refund. There may also be a large increase in claims which may add to HMRC’s workload and impact the timing.
As a result, we recommend companies submit their claims as soon as possible.
Time to Pay “TTP”
As part of the COVID-19 measures, there has been an announcement on deferring the next quarters VAT payments to 31 March 2021. This is automatic entitlement and no TTP arrangement needs to be entered into.
However careful thought and planning will need to be given in making TTP requests for PAYE/NIC particularly if, as part of the TTP arrangement with HMRC, the R&D payable tax credit is not made.
Acceleration – shortening the accounting period
To obtain the R&D payable tax credit, it is necessary to make the claim when the financial statements have been finalised by reference to the normal accounting reference date.
However, it is possible to make the claim now even if the end of the accounting period is not due to occur for a number of months. This can be done by shortening the accounting reference date which will allow companies to file their financial statements and corporation tax return early. This essentially means that this is a relevant opportunity to generate a tax refund from HMRC as soon as possible.
For example: let us assume that the company has an accounting period which ends on 30 September 2020. In this example, it is possible to apply to Companies House to shorten the accounting reference date to 31 March 2020, allowing the company to make an R&D claim from April 2020 (instead of waiting until October 2020).
It will be necessary to work hard to finalise the financial statements early in April 2020 but assuming that this is done, then it may also be possible to submit the R&D claim in April which would give the potential to receive the R&D tax refund cash in May (based on an average turnaround time of 6 weeks). This is essentially bringing forward the tax refund by 6 months.
Maximising the claim – lengthening the accounting period
This is based on the same principles as noted above and is relevant for companies who are just past their accounting reference date and are yet to file an R&D claim for that accounting period.
In this case, the company can lengthen its previous accounting period to cover the additional few months up to now. It should be noted that lengthening the period can normally only be done once every 5 years.
For example: let us assume that the company has an accounting period which ends on 30 September 2019 and the financial statements have not been filed at Companies House nor has an R&D claim been filed with HMRC. In this example, it is possible to apply to Companies House to lengthen the accounting reference date to 31 March 2020. This would allow the benefit of an additional six months of R&D claim if the company prepared an 18-month set of accounts to 31 March 2020.
How is the R&D claim impacted by the Coronavirus Business Interruption Loan Scheme “CBILS”?
Details of the CBILS scheme are set out here.
CBILS provides financial support to smaller businesses (SMEs) across the UK that are losing revenue, and seeing their cashflow disrupted, as a result of the COVID-19 outbreak. The scheme is a part of a wider package of Government support for UK businesses and employees. Managed by the British Business Bank, the scheme provides Government-backed loans with favourable interest rates through a network of lenders.
It is still possible to claim an R&D tax credit if is a company receives a CBILS loan. However if the CBILS loan is used on qualifying R&D costs, then R&D relief is not available on these amounts as it is not possible to claim R&D tax credits on subsidised costs.
The company may still be able to claim R&D payable tax credits overall, but it will have to subtract from its claim the CBILS loan money that is put towards its qualifying expenditure.
For example, if the qualifying expenditure is £250,000, but £100,000 of that is funded by your CBILS loan, the company should only claim R&D tax relief on the balance of £150,000.
It is worth noting that receiving certain kinds of grants can affect eligibility for R&D tax credits and, if your company is in receipt of such a grant, then it is recommended that you discuss that with us.