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.

COVID-19 Pivotal Enterprise Resilience Fund Reopens but with strings attached

Breaking news – the Scottish Government has announced that they plan to reopen the Pivotal Enterprise Resilience Fund next week (w/c 11th May, final details to follow) after they were inundated with applications over the first weekend of applications. The pot will swell by another £45m (£90m allocated to the fund in total) for businesses that meet the criteria but be aware – you may have an issue claiming from the Fund if you have received other ‘state aid’ such as Research & Development Tax Relief. More information will be shared by the C+T team when confirmed.

R&D Tax credits and Grants – how to maximise relief

Grants are an essential tool for growing a business, but did you know that by receiving a grant, it could restrict your company’s ability to claim further Research & Development (R&D) tax reliefs and incentives? In this article, Dave Philp Chiene + Tait’s Head of Research & Development Tax outlines the implications of receiving a grant and its impact on eligibility to receive R&D Tax Relief. Background reading on R&D Tax Relief, and its associated schemes (the SME and RDEC schemes) can be found in a previous article by Dave here.

There is a myth that, if a company receives a grant, it cannot claim R&D Tax relief. Whilst this is untrue, receiving a grant can throw a spanner in the works.

In a bid to guarantee a level playing field for European businesses, the European Commission restricts one Notified State Aid per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the R&D SME scheme. Any projects that have been in receipt of Notified State Aid will instead fall into the less beneficial RDEC scheme, where companies can claim 10p to the pound, rather than 33p.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme for the entire length of the project.

There are, however, some things that you can do to avoid any potential pitfalls. By following the tips below, it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant you are applying for – firstly, not all grants are classed as Notified State Aid. As such, not all grants will qualify you for the less advantageous RDEC scheme. De-Minimis Aid, which offers up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure will fall under the RDEC scheme, whilst the remaining unfunded expenditure will remain qualifying under the SME scheme.

Determine what project the grant relates to – the rules apply on a project-by-project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short-term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact Dave Philp today at entrepreneur@chiene.co.uk.