If not properly handled, being the recipient of government backed loans could cause some serious headaches for upcoming Research and Development (R&D) tax credit claims.
In direct response to the Coronavirus pandemic the Government rushed out the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). Whilst very welcome these schemes are, both are what is classed as Notified State Aid which restricts applications for R&D tax credits.
Misinformation has appeared online about whether or not you can claim R&D tax credits alongside government emergency funding and in this briefing paper, we aim to clear up the confusion
Why is there a problem?
CBILS. BBLS and R&D Tax Credits are all governed by an EU Temporary Framework that defined and standardised the ways in which member states (and we’re still there until 31st December 2020) can use State Aid to keep their economies afloat.
Because the SME R&D scheme is so generous, that in itself is deemed to be State Aid – and EU law prohibits a company from receiving more than one State Aid for a project.
This means that receiving even a penny by way of a Notified State Aid grant (CBILS/BBLS) would prohibit a company from claiming R&D relief for a project under the SME scheme.
Why the restriction?
Put simply, the EU rules state that companies should not receive state aid where it would result in an unfair advantage over others in the market. Receiving multiple funding from various forms of state aid would therefore clearly be an unfair advantage.
And once the grant has been received, it’s too late – a company can’t repay the grant to get back into the SME scheme – so this needs considering in advance.
How do the rules affect SMEs?
State Aid rules prevent a business using more than one form of Notified State Aid on the same project, even if they’re used at different times, and even if you pay the money back.
So if you’ve been claiming SME R&D tax credits, you won’t be allowed to use CBILS/BBLS finance to support any project that has received SME R&D tax relief.
If you haven’t yet been claiming for SME R&D tax credits, any project that you support using CBILS/BBLS won’t be eligible for SME R&D tax credits, either now or at any point in the future.
The impact of this is going to vary depending on the size of the SME, the number of R&D projects you have, and their ratio of R&D costs to total costs.
Why is this bad?
If an SME’s R&D projects have received Notified State Aid, it means that the SME cannot then claim R&D tax relief under the SME scheme.
While the SME can still claim R&D tax relief on State-Aid-funded projects, this must be done through the less-generous R&D Expenditure Credit (RDEC) scheme, which is primarily used by large companies.
Using Notified State Aid on an R&D project pushes the entire project’s expenditure out of the SME scheme and into the RDEC scheme, which gives a return of about 13p per £1 (before tax) rather than the 25-33p per £1 of the SME scheme.
A couple of golden rules
R&D tax incentives remain a perfectly viable funding mechanism for consideration alongside all of the emergency funding measures outlined so far.
They are not mutually exclusive, but their relationship can be complicated
When allocating any form of State Aid to R&D projects, the golden rules are:
- If you can, use the funding on non-R&D activities first.
- Concentrate the remainder of the State Aid on as few R&D projects as possible.
If a project has received one form of notified State aid funding, then it cannot receive another. So a project funded with money from a CBIL cannot then feature in an SME R&D tax credit claim. However, it can still be included in an RDEC claim.
SMEs in the UK already have, and still are rushing towards CBILS and BBLS as ways to sustain their businesses until some form of economic normalcy returns. The problem is, very few are aware of how these schemes will affect their ability to claim for SME R&D tax relief, and many will inadvertently breach the rules.
It’s not clear how HMRC will respond to that, but they may have little choice but to follow the rules as written.
Because the rules work on a project-by-project basis, it is possible for a business to receive a CBIL and still claim SME R&D tax credits, but it is complex and the best thing to do is talk to experts such as Davis Grant who deal with R&D tax credits every day.