Alexandra Burnside, Assistant Manager, Tax, Grant Thornton Ireland
In 2020, businesses across the UK were heavily disrupted by COVID-19, with activity levels in some industries crashing almost to a halt in March. As part of its response to the pandemic, the UK government introduced the Coronavirus Job Retention Scheme (CJRS), allowing businesses in the UK to allocate employees as furloughed workers.
As staff costs often form the majority of the qualifying costs in an R&D (Research and Development) claim, the implications of the furlough scheme could be significant for your business’ claim.
Whilst placed under the furlough scheme, your employees are not permitted to work. It is because of this that HMRC has stated that furloughed workers cannot take part in any qualifying R&D activity and therefore generally cannot be included in your qualifying staff costs.
In July 2020, the government announced a more flexible furlough scheme which allows you to bring back employees part-time. If your furloughed staff return to work part-time and take part in R&D activity, the associated staff costs to your business may be included within an R&D claim where they are undertaking qualifying activities.
Government funding – such as grants – often exclude small and medium-sized businesses from claiming under the generous SME R&D scheme. This is due to EU competition rules on state aid which continued to apply throughout 2020, and despite the end of the Brexit transition period, show no signs of changing in the near future.
Fortunately, HMRC has confirmed that the CJRS is not notified state aid. Therefore, if your employees have been working on an R&D project that qualifies under the SME scheme and those employees receive CJRS in relation to their salaries, this will not exclude the project from the SME scheme. It will only exclude your staff costs that are incurred during the furlough period.
This exclusion of staff costs during furlough applies to costs funded by CJRS, as well as any top-up payments made by the business. Additionally, should the decision be made to furlough an employee but not claim any government support, HMRC would still consider that the individual cannot be actively engaged in relevant R&D.
HMRC would therefore also expect these costs to be excluded from your R&D claims, however, there are still some exemptions.
Where qualifying R&D is being undertaken and an employee has been regarded as ‘furloughed’ but you have not claimed for their salary under the CRJS, a proportion of the individual’s staff cost could be claimed.
HMRC consider the payment of holiday pay as an essential cost of the employees undertaking R&D work, and as such, is part of your qualifying staff cost.
This is because holiday days continue to accrue for employees while they are on furlough, and upon their return to work and resumption of qualifying activities, the cost of providing these annual leave days should be considered when making your claim.
For further information or advice, Alexandra Burnside can be contacted at alexandra.burnside@ie.gt.com
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.