R&D tax and the impact of loans: what to look out for

In the past year we’ve seen a marked increase in the availability of loans for start-ups that focus on technical innovation. These provide favourable rates and have high acceptance levels, particularly for companies that are pre-revenue. There are also a number of “COVID loans” available, such as the Bounce Back Loan (BBL) and Coronavirus Business Interruption Loan Scheme (CBILS), which has provided some vital cash to keep the lights on during the pandemic.

In most instances, these favourably-termed loans are notified state aid, meaning that there are significant complexities with how they interact with R&D Tax relief. If the loan is deemed to be notified state aid, the same rules apply as if they had received a notified state aid grant. EU regulations require that a single project cannot receive more than one form of notified state aid meaning that, if it is determined that a project has been funded via a notified state aid loan, the project would be ineligible under the SME scheme.

Most of these loans are designed to support working capital commitments rather than specific R&D projects. However, we have seen companies inadvertently impact their R&D tax claim due to how they have allocated the loan. The devil is very much in the detail here and it is important to understand the terms of the loan agreement fully.

Firstly, you need to check to see whether the loan is indeed a notified state aid – something that the loan provider should be able to confirm. If it is, the activities and costs relating to the R&D project should be excluded from the loan application, protecting any tax benefit that would be available under the SME scheme. Instead, check the terms to see if the loan funds can be used for non-R&D expenditure such as marketing or rent, and keep records so that there’s an audit trail to show that there is no-cross over in funding.

Whilst these loans are on favourable terms, they still need to be repaid. It would foolish to restrict the ability to utilise all available relief due to lack of planning, particularly when most of these loans are designed to support the day-to-day running of a business rather than specific R&D projects. With a bit of tax planning it is possible to maximise the overall relief available and get the benefit of both.

If you need any support, or have any questions, contact us and we’ll help.

This post is part of our Entrepreneurial team’s regular series of blogs.

New anti-avoidance R&D tax relief measures come into force

This post is part of our Entrepreneurial team’s regular series of blogs.

A new PAYE/NIC cap on SME tax credits is coming into force for accounting periods beginning on or after 1st April 2021. The cap is designed to target fraud and abuse of SME tax relief schemes.

This measure has been a long time coming, having gone through a number of consultations. Whilst the cap is not designed to affect genuine and authentic SME tax relief claims, anyone making a claim should be aware of its impact – a business may inadvertently fall foul of the new rules, jeopardising its access to tax credits.

The measure limits the amount of payable Research & Development (R&D) tax credit which an SME can claim to £20,000 plus 300% of its total PAYE and NIC liability for the period. There is an exemption from the cap if:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

For these purposes, IP includes: any patent, trademark, registered design, copyright, design right, performer’s right or plant breeder’s right. As announced at the Budget 2021, the definition of IP has, happily, also been widened to include ‘know-how’ and ‘trade secrets’.

There is, however, still a risk that companies may inadvertently be affected by the cap – for example where the company has low payroll expenditure compared to other eligible costs and doesn’t meet the above exemption.

In most instances, particularly where the company is an early start-up, the tax credit can provide a vital lifeline. The PAYE/NIC cap adds another layer of complexity to the tax claim processes which – whilst not impacting the majority of claims – requires companies to plan now rather than wait to the end of their accounting period, to ensure that there is no unintentional impact to this critical source of funding.

If you have any questions, contact me at david.philp@chiene.co.uk or 131 558 5800.