Accessing funding now under Government supported loan schemes may impact on a company’s ability to claim R&D tax relief under the SME scheme in the future – what management teams need to be aware of when considering financing options
The economic impact of the coronavirus pandemic means that managing cash flow effectively has never been more important to businesses, and R&D tax relief is a valuable means of unlocking cash for UK companies.
Following the introduction of several measures providing additional support for businesses, many SME companies will be looking at whether they need to, or are able to, access the various funding options available to them. However, care is needed, because HMRC has confirmed that a number of these measures constitute notified state aid for the purposes of EU rules. As the SME scheme of R&D tax relief is also a notified state aid, this may negatively impact a company’s ability to claim R&D tax relief under the SME regime, because under EU law and the UK’s Corporation Tax Act 2009, an R&D project may only have one source of such aid.
Management teams need to be aware of this, to enable them to make informed decisions around immediate funding needs and future cash flow forecasts.
What are the implications if I obtain Government supported funding?
The Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loan Scheme (BBLS) are all forms of notified state aid. As such, if you receive funding under any of these schemes towards an R&D project, any expenditure on the project will not qualify for the SME scheme of R&D tax relief (a claim under the R&D expenditure credit (RDEC) scheme may still be possible, albeit at a less beneficial rate).
Are all of the coronavirus business support schemes notified state aid?
No, only the three above. The use of the Coronavirus Job Retention Scheme (CJRS) and the receipt of funding from the British Business Bank Future Fund do not constitute receipt of notified state aid, meaning that any support obtained under these schemes will not impact your ability to claim R&D tax relief under the SME scheme.
What if I receive a grant that isn’t notified state aid – does this affect my R&D claim?
Yes, if an SME receives a grant towards an R&D project that is not notified state aid, then the amount funded by the grant will qualify for relief under the RDEC scheme but not under the SME scheme. However, any self-funded element of the project in excess of the grant may still be qualifying expenditure under the SME scheme.
The CBILS/CLBILS application forms refer to ‘de minimis aid’ – what is this?
De minimis aid is not notified state aid - the state aid rules treat smaller amounts of funding, which are not of a level that could distort competition, as de minimis. For most industries, the de minimis limit is €200,000 over three years.
If a company has received de minimis aid, this will mean that the ability to claim R&D tax relief under the SME scheme is restricted, but only to the level of the funding received, ie it won’t taint the whole project, as is the case with notified state aid.
When completing the various application forms, against the question ‘is the company in receipt of any other de minimis aid?’, previous receipts of SME R&D credits are excluded, so in isolation, you would not be required to declare these.
Is this measured on an accounting period basis?
Unfortunately not, the rules apply for the life of the project, so any notified state aid received for a project will taint the project permanently.
What happens if I have received CBILS/CLBILS/BBLS, but not specifically for an R&D project?
HMRC’s Technical Unit have made the following comments, made available to RSM through our involvement in the R&D Consultative Committee:
The measure is a fully notified aid, so the restriction… 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. For example, a loan used entirely for R&D might lead to [the notified state aid restriction] applying.
Therefore, it appears that HMRC’s view is that where a company has successfully applied for the CBILS/CLBILS/BBLS and the funds are used for general business support, the company should be able to continue claiming R&D tax relief under the SME regime.
HMRC have further clarified that they will be looking carefully at such claims, but that provided loans are obtained for general use, and are applied in such a way, including for non-R&D qualifying expenditure, then a restriction is unlikely to apply. Clearly this is a complex area, and we recommend advice is sought at the time of making the funding application.
In order to demonstrate that any funding received is not used specifically for such purposes, it is recommended that contemporaneous documentation is maintained detailing the purpose for which the loan was sought and the way in which any funding received was applied.
SME regime vs RDEC regime – tax benefits
The SME scheme
The SME regime provides the relief in two ways. The relief provides an additional tax deduction equal to 130 per cent of the qualifying expenditure that can be used to reduce a corporation tax liability in a current, previous or future year. For companies that are loss-making, a further claim can be made to ‘surrender’ the amount of the qualifying expenditure plus the additional deduction for an immediate cash payment (provided that the amount of the surrender does not exceed the total tax loss).
Based on the current corporation tax rate of 19 per cent, the total additional benefit of an R&D tax relief claim under the SME scheme is £24.70 per £100 spent for profitable companies. Loss-making companies can realise a payable tax credit of up to £33.35 per £100 spent by opting to surrender the loss, though in doing so they would forgo future tax relief worth up to £43.70 (assuming there are no changes in the corporation tax rate).
Although the value of the cash payment is potentially less than the amount of the future tax saving that could be obtained by carrying forward the loss instead of surrendering it, for many businesses, in the current environment, the benefit of receiving cash immediately will most likely take precedence.
The RDEC scheme
The RDEC scheme is the successor to the previous large company scheme, available to companies that fall outside of the SME size limits, or that are otherwise disqualified (for example, due to receipt of subsidies or grants).
The RDEC is itself taxable and its value can either be set against a current tax liability, or, if there is none, received as a payable credit. The amount of payable credit a company may receive is capped at the total amount of income tax and Class 1 National Insurance contributions for which the company is required to account to HMRC under PAYE for the relevant period.
Where an RDEC credit is paid to a company, rather than set against its tax liability, the corporation tax element is withheld and carried forward to set against future corporation tax liabilities of the company, consequently ensuring that both profitable and loss making companies are afforded the same cash flow benefit.
The rate of the RDEC is 13 per cent, so at the current corporation tax rate of 19 per cent, the net of tax benefit is £10.53 for every £100 spent.