Caution: COVID-19 loans could affect Research & Development Tax claim

The Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan (BBL) are two of the most common COVID-19 reliefs provided by the Government, facilitating in over £50bn in loans that have helped thousands of businesses with their cashflow during the pandemic. These have proven to be a vital lifeline to many, but there are complexities with how they interact with R&D Tax Relief, the ‘go-to’ cash relief for innovative companies since 2002.

If companies are not careful with their funding applications, these can adversely impact future R&D tax claims. With the opportunity to apply for CBILS and BBL funding ending soon, it could lead to a rush in claims. But you should take care.

State Aid

Both CBILS and BBL are notified State Aids, meaning that being in receipt of either loan could impact an SME R&D Tax Relief claim, particularly if the loan relates specifically to R&D expenditure rather than being used more generally to support the Company as the funds are intended. EU regulations require that a single project cannot receive more than one form of notified State Aid. If it is determined that a project has been funded via either CBILS or BBL, this would mean that the project would be ineligible under the SME scheme.

Avoiding the trap

The loans are not designed to trap companies, but it is important to ensure there is no confusion. When applying for a loan, check the terms to ensure the funds can be used for non-eligible expenditure such as marketing costs or rent. Keep records of where costs have been allocated so that there’s an audit trail that shows the R&D project expenditure is ring-fenced from the loan. Finally, and most importantly, when providing details as to what the loan will be used for, the activities relating to the R&D project shouldn’t be mentioned. The loans are designed to support the day-to-day running of a business rather than specific R&D projects.

The effect of the loan on a R&D claim will depend on the facts of the case. However, providing specific details of the R&D project in the loan application will only confuse matters as to whether the project has been subsidised or not. If you have a query about how loans impact a claim for Research & Development Tax Relief contact us today.