Last updated: 2 December 2020
HMRC have provided the professional bodies with an update on various issues raised by the COVID-19 crisis in relation to corporation tax R&D relief.
R&D relief claims and repayments
HMRC have confirmed that their priority is to maintain their published aim of clearing 95% of SME R&D tax credit claims within 28 days, and indicated that they are currently meeting this aim.
HMRC have said that, whilst the deadlines for making claims under the SME and Research and Development Expenditure Credit (RDEC) schemes are set by legislation, they will be sympathetic to those facing problems in meeting these. If a business is unable to meet the time limit, they should submit their claim as soon as possible and HMRC may be able to accept a late claim. HMRC will decide whether each such claim will be accepted in line with Statement of Practice 5/01.
Set off of R&D claims against other taxes
HMRC have indicated that, where Ministers have agreed that tax can be defered for a specific regime to support businesses in the COVID-19 period (e.g. the VAT payment deferral), any RDEC or SME payable tax credit will not be set against amounts deferred before the revised due date.
However, by contrast, where tax has not been the subject of a blanket deferral, but is instead deferred as part of a Time to Pay (TTP) arrangement, HMRC will follow existing policy and set any R&D tax credits off against any TTP liability, not just the amount owing at the point in time the credit is paid.
HMRC have less leeway when it comes to offsetting credits under the RDEC scheme than the SME one, as it is a legislative requirement that any RDEC remaining at Step 6 is set-off against any liability owed to HMRC. HMRC does not have the power to provide for a temporary relaxation of this rule and there are no plans at present to legislate to provide a temporary relaxation.
By contrast, credits under the SME scheme can be applied on a discretionary basis. HMRC will consider the particular circumstances of a customer on a case-by-case basis if they have objections to the credit being set off against other liabilities.
Staff costs relating to furloughed staff
Where staff have been furloughed under the Coronavirus Job Retention Scheme (CJRS) costs relating to them may be excluded from R&D claims.
In particular, where an employee has been fully furloughed, such that they have ceased all work, HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant R&D during those times. This means that, whilst on furlough, any costs in respect of them would be excluded from both R&D and RDEC claims.
In addition, to the extent that staff costs have been met through the CJRS, they would be treated as having been subsidised and will therefore not qualify for the SME scheme.
More information on the interaction of the CJRS and R&D relief can be found in HMRC's manuals.
The “going concern” requirement in the SME scheme
Under the SME scheme, a claim for either an enhanced deduction or repayable credit can only be made if the claimant was a going concern based on their latest published accounts.
HMRC have confirmed that this going concern condition is a statutory requirement, and therefore cannot be overlooked. However, they note that the requirement involves looking at the latest published accounts which will, in many cases, have been prepared before the effects of the COVID-19 crisis began to be felt.
HMRC will continue to monitor the impact of COVID-19 on companies’ ability to meet this and other requirements.
State Aid and Government support schemes
If COVID-19 Government support schemes are classed as State Aid they may affect a company’s ability to claim under the SME R&D scheme (which is itself a form of State Aid).
HMRC have confirmed that Bounce Back Loans, the Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS) are all notified State Aid, meaning that s1138(1)(a) CTA 2009 could potentially prevent a claim for SME relief. However, HMRC say that they would only expect this to happen where the loan relates specifically to the company's expenditure incurred on an R&D project, rather than providing general support for the company. This will depend on the facts, and HMRC notes that, for example, a loan used entirely for R&D might lead to s1138(1)(a) applying.