This is a difficult issue to deal with because I genuinely believe the government has done a good job of supporting business through the pandemic. I do not think they intended to “give with one hand and take with the other”. But Covid support measures do interact with existing legislation in ways that are not always favourable from every perspective.
The Bounce Back Loan scheme is one of the most widely taken up supports in the pandemic. This is the up to £50k loan that most business have taken out. It is a State Aid for most companies (To add complications unless a company is in “financial difficulty” and self-declared in BBLS application in which case it is De Minimis aid).
Based in EU State Aid law (I know we left but little has changed yet) the law relating to SME R&D claims and State Aid is that:
“If a company is in receipt of a notifiable State aid for an R&D project it cannot claim any other State aids. This is to avoid the company receiving more State Aid than is permitted under the State Aid cumulation rules.” Source “CIRD81670 – R&D tax relief: conditions to be satisfied: effect of notified state aid (SME scheme only)”
This means state aid for an R&D project like a Bounce Back Loan prevents an SME claim being made, as an SME R&D claim is also a State Aid. Such a rule does not apply to RDEC, large company R&D claims, and under these circumstances an SME can claim under the RDEC scheme providing the expenditure qualifies under RDEC.
One response when faced with this issue is an attempt to argue that it is not a Grant but a Loan therefore the rule does not apply. This argument does not get round the problem as the issue is about State Aid not how it is delivered.
HMRC have given R&D guidance on the various Covid support schemes in CIRD81650 and staff related support CIRD83200. I am just going to focus on Bounce Back Loans with a practical example of how this can impact.
A worked example.
I spent an hour this week on a zoom call with a client we were helping with a claim through our Giving Back scheme for start-ups. The specifics were:
- A single R&D project.
- All they did was R&D. They were looking to claim 79% of the company’s expenditure in an R&D claim. The R&D expenditure was about £80k.
- They had an Innovate UK grant of about £50k which was for staff R&D expenditure the grant was de minimis.
- They had about £30k in subcontractor costs.
- They had taken out a Bounce Back Loan of £50k and had about £2k in cash at the of the accounting period.
First of all, without considering the Bounce Back Loan they could have claimed the grant funded element under RDEC and because the grant was de minimis the remainder of the project under the SME scheme. Had the grant been a State Aid as already covered the entire project could only be claimed under RDEC.
This would give them:
RDEC of £50k*13%=£6,500 but it is taxed so less 19% £5,265 (The problem with RDEC was no profit therefore no Corporation Tax to set RDEC against, and 5 minimal salaries with no PAYE or NIC so the payable RDEC was zero and the RDEC could only be carried forward for a future benefit if either of those factors changed. RDEC is horrible for most start-ups in cashflow terms as they pay little or no salary and don't make a profit)
An SME claim R&D Tax Credit of £30k*230% giving a surrender able loss of £69,000 worth at 14.5% an R&D Tax Credit of £10,005 which crucially was money they would get once the R&D claim was filed and processed by HMRC. SME R&D claims are great for start-ups as they will always at least get some cash even while making a loss and with no PAYE or NIC (For accounting periods starting from 1st April 2021 R&D Tax Credit claims will be capped on the basis of £20,000 plus 3*NIC/PAYE with other potential exemptions).
But the Bounce Back Loan changed the picture as it is a State Aid. If the company had been larger, for example £1 million expenditure and £500k of R&D expenditure, the fact that there was £500k of non R&D expenditure would mean the £50k of Bounce Back Loan could be viewed as being for general support and not specifically related to the R&D. e.g., £1million less £50k equals £950k the loan does not touch the R&D expenditure of £500k. But because there was only about £100k of expenditure and the R&D expenditure was £80k the loan clearly did relate to the R&D expenditure, as the client said themselves it largely went on the subcontractor.
This pushed the entire claim into the RDEC scheme. R&D expenditure subcontracted to another company cannot be claimed under RDEC. The claim was reduced to the first element above an RDEC of £5,265 which was not payable at this point in time due to the NIC/PAYE on R&D staff restriction.
It could be viewed that my client is being treated harshly. Without Covid they would have claimed a R&D Tax Credit of about £10k. But without Covid they might not have received the Innovate UK grant and would not have been able to gain the Bounce Back Loan of £50k for sure. Were they better off with a £50k loan on generous terms versus £10k of cash now that they would not need to pay back? The answer is not black and white and would depend on how crucial money was at the point in time. It could also be viewed that the law did exactly what it was meant to do, prevent too much State Aid being given out so that State Aid does not distort competition.
This is a real-world example. It is also in some senses a “perfect storm”. Most of our clients R&D claims are not impacted by Bounce Back Loans as the size of R&D expenditure against all expenditure is such that the loan can be viewed as being for general business support and not related to an R&D project. Most clients are also either profitable or pay enough NIC/PAYE that caps on payment are not an issue for RDEC. The complications very much related to “difficult” parts of the R&D scheme e.g. the interaction with Grants and State Aids, plus the different rules and calculations between SME R&D claims and RDEC.
These are complicated issues, and this article is not a DIY guide. The relationship between State Aids including Grants, Loans, and R&D Tax Relief claims is complex. It is definitely an area where professional advice should be sought before potentially costly decisions are made.
Christopher Toms MA MAAT, Technical Director RandDTax.