In these uncertain times of COVID-19 businesses across all sectors are being forced to innovate, whether that is developing new software, new manufacturing techniques or even developing new product lines.
The Launch of Future Fund
The Government has made up to £250 million of funding available by way of direct co-investment into certain UK start-up companies, as part of a new Future Fund.
In addition, Innovate UK, the national innovation agency, is extending up to £750 million of loans and grant funding to innovation driven businesses focussed on research and development.
Research & Development tax credits: A boost for cashflow
If grants are not used to finance innovation, then there may be business costs which can be subject to Research and Development tax credits.
As we cope with the crisis, the primary focus of many businesses is likely to be retaining customers and managing cash. Despite this the expenses incurred in innovation should be captured in a way that allow for easy identification. This is because those costs may to be basis of an R&D credit claim. This can be a valuable boost for cashflow,and in our experience, one that can be available quite quickly after application.
If the Finance Bill 2020 is enacted as drafted, the Research and Development Expenditure Credit (RDEC) payable to larger businesses increases to 13% from 1 April 2020 with the enhanced deduction from the SME sector being unchanged at 130% of the qualifying expenditure.
As part of the COVID-19 response HMRC has confirmed that it remains their priority to process 95% of SME tax credits within 28 days of receipt. For the loss-making SME the credit can be surrendered to HMRC for a payment of almost 33p in the pound.
Legislation requires HMRC to offset some of the credit against any taxes owing to themselves and only repay the balance. It has been suggested that HMRC have no discretion about varying this in respect of RDEC claims. This is because the legislation covering administration of RDEC is heavily dependent on the claimant being up to date with their taxes. The same formulaic rigidity does apply to claims from the SME sector and it is hoped that HMRC will be flexible and support SMEs which are looking for funding through the R&D credit process.
Legislation also requires the claimant company to be a going concern, as expressed in the latest published accounts. For most companies this will be accounts prepared before the COVID crisis and therefore going concern should not be an issue. With the extension of Companies House filings by three months it may be possible for companies to defer their audit and therefore release of published accounts. With a delay in the audit the risk is that going concern may be difficult to demonstrate resulting in audit opinions making adverse comment, and there being a knock-on effect of an inability to make R&D credit claims.
The Government’s Coronavirus Business Interruption Loan Scheme (CBILS) for SMEs is a state aid and acknowledged as such. R&D tax relief claims cannot be made on costs which are subject to state aid. Currently the interaction of state aid and R&D credit claims is unclear. It would seem logical to conclude that CBILS loan monies which are used to finance R&D would restrict the ability to make an R&D credit claim. One would like to think that CBILS loans which are applied to support a company generally would not restrict the tax credit claims. This is evolving thinking and it is hoped that more clarity will be delivered in due course.
In conclusion, the innovation that British companies are experiencing should be identified and quantified as they may be the basis of a Research and Development tax credit claim and that claim could help finance the future of the business.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.
Will by refund be withheld if there are deferrals of tax due to Covid?
Further to communication with HMRC, we believe that the VAT deferral announced for quarter to June will not constitute a tax deferral but all other outstanding tax liabilities may well be offset against the potential R&D tax credit.