Research and Development (R&D) relief is introduced by the government to encourage companies to invest in research and development which offers additional relief on the expenditure incurred towards this end.
The government has confirmed that R&D for tax purposes only takes place when a project seeks to achieve an advance in either science or technology. Activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty need not be achieved or fully realized – as long as the expenditure towards this advancement is incurred, R&D still considered to have taken place.
An SME company that qualifies for the relief will be allowed to claim an additional deduction equal to 130% of the cost incurred on R&D in calculating the company’s taxable profit. The effect of this relief is that the company will be able to deduct up to 230% of qualified R&D expenses from their taxable profit which can result in a significant reduction in corporation tax payable or issue of tax credit by HMRC to the company if there is a surrender loss.
Undoubtedly, there are certain conditions in relation to the R&D expenditure to be met before such expenditure can qualify for tax purposes. It must be revenue expenditure; related to the trade, incurred on staff and software; it must not be subsidized and lastly, the company must be a going concern with the intention of trading for the foreseeable future.
In these difficult times when businesses are considering a wide range of support from the government, R&D relief is widely considered by professionals to keep businesses afloat. But unfortunately, receiving of other support schemes by the government could seriously reduce the chances of success of any R&D relief claim due to the European rules surrounding state aid given to companies. However, this could change at the end of the transition period.
The state aid rules exist to prevent unfair advantage being given to selected businesses and there are financial limits to what a company can receive in state aid. R&D relief is regarded as state aid and likewise some of the schemes (such as the Bounce Back Loan (BBL), Business Grants, Job Retention Scheme for Employers and CIBLS loans, etc.) recently introduced by the government with good intention to support businesses during the Covid-19 pandemic.
The implication of this state aid rule could limit the chances of success of an R&D relief claim made or could result in a repayment demand of an R&D claim already given to a company if such incentive is withdrawn by HMRC. So that means if, for instance, Bounce Back loan has already been received, there is a risk that any new state aid such as R&D relief may be denied by HMRC. There has been a considerable number of businesses that have fallen into the state aid rules where they received Bounce Bank Loan but were denied R&D tax relief which would have been more beneficial because BBL is a loan that would be paid back unlike the R&D relief. Alternatively, one could say BBL is preferable in terms of cash flow.
To circumvent this, the company needs to be clear that the BBL loan received is not spent on any R&D projects other than ordinary support for their business (i.e. provision of working capital for the business) and evidence for this must be kept. If this is absolutely distinct in the application of R&D relief claim, it is improbable that their application will be affected even if a BBL loan has been received prior to an R&D claim by the company.
Please seek professional advice so that an assessment can be made, and the eligibility of your R&D relief can be checked, even if you have received a BBL loan.
Olamide Soyombo is Client Manager at Bergen Associates and can be contacted on