It is widely known that the Coronavirus pandemic has had a negative impact upon all types of business across the world in one way or another. In direct response to this, the European Commission has adopted a Temporary Framework that defined and standardised the ways in which Member States can use State Aid to keep their economies afloat.
It is under this framework (which runs until 31 December 2020) that the Government rushed out the
Coronavirus Business Interruption Loan Scheme
(CBILS) and the
Bounce Back Loan Scheme
Whilst these schemes have been welcomed with open arms by UK businesses, both CBILS and the BBLS are classified as Notified State Aid which should cause concern amongst SME companies that are conducting R&D in the not-too-distant future.
Why the concern?
The main issue is that R&D tax relief for SMEs is also a Notified State Aid, and State Aid rules prevent a company from using more than one form of Notified State Aid on the same project, even if they are used at different times, and even if you pay the money back.
The consequences of this are twofold:
1. If a company has been claiming SME R&D tax credits, the SME will not be allowed to use CBILS/BBLS finance to support any project that has received SME R&D tax relief.
2. If a company has not been claiming for SME R&D tax credits yet, any project that the company supports using CBILS/BBLS will not be eligible for SME R&D tax credits, either now or at any point in the future.
The impact of this is going to vary depending on the size of the SME, the number of R&D projects undertaken by the company, and the ratio of R&D costs to total costs. To illustrate the potential impact we have described three possible scenarios below.
Scenario 1 - An SME with one R&D project.
Most of their business expenditure relates to this single project, for which they have been claiming SME R&D tax relief. Say, for example, the SME spent £90k in the relevant claim period, and £80k of this was on R&D expenditure for a single project (£10k spent on non-R&D expenditure).
If the SME receives £50k from the BBLS, how should it use this money? The answer is that because it’s single project has already received a Notified State Aid (in the form of SME R&D tax credits), it should only allocate the BBLS money to its non-R&D costs, or to new projects that have not received R&D. This leaves the company in a challenging position in that it cannot fund its major activity without breaking State Aid rules.
Scenario 2 - An SME with three R&D projects, none of which have received SME R&D tax credits.
How should the company best use its £50k of Bounce Back funding? The worst way to do it is to spread the £50k of BBLS money across its three R&D projects. This is because now, all of the SME’s three R&D projects have received Notified State Aid, which means that the SME cannot claim R&D tax relief under the SME scheme. While the SME can still claim R&D tax relief on all three State-Aid-funded projects, this must be done through the less-generous R&D Expenditure Credit (RDEC) scheme, which is primarily used by large companies.
Scenario 3 - Use the £50k BBLS to concentrate funds in as few projects as possible.
Following on from scenario two, say, for example, the SME uses the £50k to fund project 1, leaving projects 2 and 3 unaffected by State Aid. This means that the SME could claim R&D tax relief under the SME scheme for projects 2 and 3, and R&D tax relief under the RDEC scheme for project 1.
There are some important things to remember about Notified State Aid and R&D projects, the key points of which are as follows:
- SME R&D tax credits, CBILS and BBLS are all forms of Notified State Aid.
- You can only use one form of Notified State Aid per project, for the entire lifetime of the project.
- The effect of using Notified State Aid on an R&D project is to push the entire project’s expenditure out of the SME scheme and into the RDEC scheme, which gives a return of about 10.53p per £1 (before tax) rather than 24.7p per £1 under the SME scheme.
- When allocating any form of State Aid to R&D projects, the golden rules are as follows:
(i) If you can, first use the funding on non-R&D activities.
(ii) Concentrate the remainder of the State Aid on as few projects as possible.
(iii) Maintain good financial reporting so that an argument can potentially be formed (where appropriate) that the funding has been used on none or the fewest possible amount of qualifying R&D projects. This issue is likely to be of most relevance to SMEs where a high proportion of their overall costs qualify as R&D.
- Even if an SME company is not planning to make an R&D claim moving forward, it is important to be aware that HMRC could potentially take retrospective action and claw back any SME R&D tax relief received in relation to a previous accounting period.
SMEs in the UK are rushing towards CBILS and BBLS as ways to sustain their business until some form of economic normalcy returns. The problem is, very few are aware of how these schemes will affect their ability to claim for SME R&D tax relief, and many will inadvertently breach the rules. It is not clear how HMRC will respond to that, but they may have little choice to follow the rules as written.
Needless to say, there are many aspects to consider here, and expert advice relevant to your specific circumstances should be sought. For help and support concerning the potential impact of funding on your R&D claim, please contact Jamie Nice, Tax Director at firstname.lastname@example.org or on 01702 606831.