24TH JUNE, 2020

Can You Claim R&D Tax Credits For Furloughed Staff?

In short, yes - it can. But it may not be straightforward.

R&D Tax Credits are a valuable way of reducing a company’s Corporation Tax bill to reflect a portion of their R&D expenditure. With COVID-19 turmoil, many businesses are pleased to find they can benefit, and even those that have made a loss can receive the relief as cash instead.

However, these aren’t usual times and some of the government’s emergency COVID-19 support for businesses can affect you company’s claim. Here we look at furloughing specifically.

Does the job retention scheme impact R&D tax credits?

The government Job Retention Scheme “JRS” provides businesses with cash income for furloughed employees.  The good news about this government allowance from an R&D tax credits perspective is that the JRS is treated as gross income and therefore subject to corporation tax.  This means that you don’t need deduct the JRS receipts from employee wages when claiming R&D tax credits.  Also as you’re continuing to pay the furloughed worker through the PAYE system then this would be treated as eligible staff costs.

You may be thinking that a furloughed worker isn’t actually attending work and performing R&D tasks. That is correct, however you would claim for the workers full gross pay and apportion this to the number of actual work days performed on R&D activities as a proportion of actual working days

What R&D activities will qualify for the relief?

The R&D Tax Credits scheme is open to any UK business in sector. As long as your project involves spending money on tackling a specific technological or scientific uncertainty, then your business could well qualify. This might be creating a new product, process or service from scratch for example, or in significantly improving an existing one.

To help, HMRC have given guidance on what kinds of activities needs to be present in the project for it to qualify.

What R&D costs can be claimed for?

There are a broad range of costs that can attract R&D Tax Credits and may be included in your claim. The key ones however are staff costs (such as wages, overtime and employer’s NIC/pension payments), certain types of software, payments to subcontractors and freelancers and consumables used up in the R&D process.

You can find a more comprehensive list by reading our recent blog: What Costs Can You Claim Through R&D Tax Credits?

Reduced qualifying staff costs will likely affect the claim amount

For some companies, COVID-19 may mean their R&D activities have actually increased. This may be in relation to drug testing for example, or vaccine research. However, many more businesses were forced to close up altogether during the lockdown, meaning they furloughed staff, reduced the number of those still working and scaled back their R&D activities and expenditure.

This all means it’s essential to work out how best to calculate the correct apportioning of eligible costs and whether a flat apportionment of costs is a suitable way forward.

Sometimes it may even be more relevant to split costs. For instance, an employee who previously spent a large amount of time on qualifying R&D activities may now have been furloughed on a potentially reduced salary. Alternatively, they may still be actively working, but on greatly reduced hours (and pay). With this scenario, apportioning R&D on a weekly or monthly basis could have a far more positive impact on the claim value than a flat percentage apportionment of total costs over the year. It may also more accurately reflect the relationship between the costs and the R&D work in question.

HMRC will generally be sympathetic to situations where relevant staff have been furloughed, but it’s still the company’s responsibility to make their R&D tax relief claim watertight.

With team members involved in R&D projects currently furloughed or working from home, wouldn’t it be easier if I just wrote the narrative by myself?

No, we strongly advise you don’t do this. The vast majority of R&D projects involve many different people, both inside and outside the company, across a range of disciplines. There are likely to have been designers coming up with prototypes for example, and scientific experts in your field who will also have had an input. Then you’ve got staff involved in manufacturing and testing to name but a few - essentially, you won’t have gone it alone.

In order to put together the most accurate, optimised claim (that will maximise the benefit you receive whilst avoiding hot water with HMRC) you’ll need to collaborate with those team members in the know. They will need to have an input into exactly what scientific or technological uncertainties were addressed, and how. They will also be able to supply relevant costings and figures, as well as be able to explain in more detail what work was undertaken. If you try and create an R&D Tax Credits claim that involves some ‘educated guessing’ shall we say, then HMRC will spot it a mile away and they’ll start asking questions. We looked at this in one of our recent blogs: R&D Tax Credit Investigations By HMRC Are On The Rise: Don’t Get Caught Out.

It is also worth remembering that furloughed company directors can (and should) still carry out their statutory duties. This includes filing accounts and dealing with tax, so even if they are on furlough then they may well still be able to help.

Note too, that it may be possible in some cases to file your claim with estimated figures, however they still need to be as accurate and honest as possible. You can then update these figures to accurate ones once the necessary people return to work.

Why use the Tax Cloud portal?

At Myriad Associates, we know that time and money are precious. That's why we developed the Tax Cloud portal, so that you can put together your own successful R&D Tax Credits claim with support from us when you need it. And, in order to make sure that you gain the maximum R&D tax relief possible, your company financials and your narrative statement will be reviewed by our team of R&D tax experts before submission to HMRC. This will allows us to flag up any issues and help you get the relief you deserve.

Try the Tax Cloud portal for businesses today to see what your business could claim and kick off your application. With UK claims averaging £54,000 it may be the best thing you’ve done all year.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Myriad are the creators of Tax Cloud, we help enterprises navigate, apply and secure tax incentives and grants. We specialise in R&D Tax Credits, Creative Tax Reliefs, Innovate UK grants, Horizon Europe grants, and R&D Capital Allowance Claims.

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Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate