Staff costs for directors and employees directly or indirectly engaged in qualifying research and development (R&D) activity are usually one of the largest components of an R&D claim. With furlough now extended until the end of March 2021, companies could have up to 12 months where their R&D claim is significantly impacted by furloughing of staff.
In response to the Coronavirus Job Retention Scheme (CJRS), HMRC has recently updated their guidance to explain the treatment of staff costs where individuals have been furloughed due to the COVID-19 pandemic.
Furloughed employees (and CJRS grant claimed)
One of the key conditions of making a claim under the CJRS when it was first introduced in March 2020 was that a furloughed employee must cease all work in relation to their employment for the furlough period. From 1 July 2020, it has been possible for furloughed employees to work part-time, although the employee is still required not to undertake any work in relation to their employment during a CJRS claim period.
HMRC, therefore, consider that furloughed employees cannot be regarded as being directly or actively engaged in relevant research and development during furlough and will expect to see these costs excluded from R&D claims. This applies to both furlough payments met under the CJRS and any top-up payments by the company itself.
Furloughed employees (no CJRS grant claimed)
Some companies may have furloughed staff, although chosen not to claim the CJRS grant or been ineligible to claim. In this case, staff costs can only be claimed for the furloughed staff to the extent that they have undertaken R&D work.
The company should continue to claim the “appropriate proportion” of staff time spent on R&D activity, however, this may result in a lower percentage of staff costs being claimed compared to previous years to reflect the lack of activity during the furlough period.
Holiday pay and sick pay
HMRC considers that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is part of the cost of their working time. Unlike salary costs whilst on furlough, holiday and sick pay should be apportioned between qualifying and non-qualifying time and claimed accordingly.
Companies should, however, note that the CJRS grant will be treated as a subsidy (although not notified state aid) and therefore any R&D claim for holiday or sick pay whilst on furlough cannot be made under the SME scheme. A claim is permitted for companies of all sizes under the large company (RDEC) scheme. HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staff costs in these circumstances.
One-off staff payments
In addition to furlough payments, some staff may be receiving payments in lieu of notice or payments for gardening leave. HMRC would normally expect these costs to be excluded from an R&D claim on the basis that they relate to periods where employees cannot be regarded as directly or actively engaged in qualifying R&D activities. Case law also excludes any redundancy payments from qualifying staff costs.
Other one-off payments, such as bonuses, may still qualify as remuneration paid to staff although should only be included in a claim to the extent or proportion that they can be attributed to relevant R&D activities.
In the last 20 years, over 300,000 R&D claims have been submitted to HMRC and £33.3billion has been claimed in tax relief. This is likely to be an area of continued focus for the government to attract and retain innovation in the UK. There is also the possibility of making R&D tax relief more advantageous post Brexit when not restricted by EU State Aid rules.
For companies claiming relief against their corporation tax liability, the value of the claim will also increase if corporation tax rates rise in the future making it even more important to review potential claims and maximise existing ones.
This post was written by Gemma Thake, Senior Tax Manager. Price Bailey has extensive experience with R&D tax relief. If you have any questions on the above or related to making an R&D claim, you can contact Gemma using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.