Taking CBILS cash now may mean you could lose SME R&D tax credits later
Last updated 14 April 2020
Financial support and R&D tax credits
The Coronavirus pandemic has caused the Government to take unprecedented steps to provide financial assistance to UK companies.
These measures have included the provision of the following grants and loans:
- Small business grants of up to £10,000
- Grant funding of up to £25,000 for retail, hospitality and leisure businesses with property of a rateable value between £15,000 and £51,000, and
- The Coronavirus Business Interruption Loan Scheme (‘CBILS’) offering loans of up to £5 million for SMEs.
The CBILS is intended to enable SMEs to access bank loans, with the government covering the first 12 months of interest payments and lenders’ fees. This can provide a lifeline to many SMEs which are struggling with cash flow issues resulting from the pandemic.
For many companies, the decision whether to apply for a loan under CBILS will be driven by an urgent need to remain commercially viable. However, in the longer term, they may find their overall cashflow has been adversely affected if they are also seeking to claim R&D Tax credits under the SME scheme.
R&D tax credits
R&D tax credits are a form of tax incentive available to companies undertaking qualifying R&D activities. There are two regimes under which a company can claim:
- The SME regime for R&D tax credits provides potential corporation tax savings or refunds of between 33% and 43.7% of qualifying expenditure on R&D projects.
An SME is defined as a company that (along with its linked and partner entities) has fewer than 500 employees and either an annual turnover not exceeding €100m or a balance sheet not exceeding €86m.
- Large companies (or certain SMEs which don’t qualify for the above) can claim R&D Expenditure Credits (‘RDEC’). These are less generous but can still create an effective tax credit of up to 10.53% of qualifying R&D expenditure.
Impact of CBILS on R&D tax credit claims
For the purposes of SME R&D tax credits, a company being in receipt of grants and subsidies (including certain loans) can restrict the amount of qualifying expenditure and partially limit the relief available.
Where the grant or subsidy received is ‘Notified State Aid’ (NSA) this results in the total exclusion of all of the relevant project expenditure from the SME scheme. This is because the SME tax credit itself is also a form of NSA and a company can only be in receipt of one form of NSA on any one project.
HMRC have confirmed that CBILS will be classified as ‘fully NSA’. They have further stated that this could mean that where the CBILS relates specifically to the company’s R&D expenditure on a project (rather than being used more generally to support the company) there is a risk that all of the expenditure on the R&D project is excluded from future tax credit claims under the SME scheme. This can lead to a significant reduction in the R&D tax relief received over the life of a project and thus negatively impact on long term future cashflow.
As a result, there is a significant risk that SMEs which have previously claimed the more generous R&D tax relief may find that they will be unable to claim this in the future, if they have also claimed CBILS.
Another punitive outcome of the State Aid rules is that where companies have previously claimed R&D tax credits under the SME regime, they may potentially be unable to claim CBILS. This restriction may apply where a company has previously claimed more €200,000 euros under the SME R&D regime in the previous three years, effectively punishing companies which have invested heavily in innovation.
What can be done?
This issue is an unintended consequence of the speed at which the government has needed to introduce their financial support package to help businesses survive during the pandemic.
Ultimately if a company urgently needs funding, then the short-term commercial necessity of securing finance may well need to take priority over any longer-term considerations.
In these cases, an R&D claim is likely to be restricted to the RDEC scheme.
Where a company has received a grant or other form of NSA support for a specific project, it cannot subsequently repay this in order to claim R&D tax relief. It is therefore important to review the impact of any grant or loan prior to the funding being applied for or accepted, as the decision cannot be reversed.
With appropriate wording, it may still be possible to obtain financial assistance for your company under CBILS without this impacting on your R&D claims. However, this is a developing area which is being monitored by HMRC and may well be subject to further changes or clarification over the coming weeks and months.
Companies should also take care to consider whether previous R&D claims may potentially prohibit them from claiming CBILS.
It is important that you seek advice from a specialist prior to applying for or accepting any grant or loan funding if your company also undertakes R&D activities.
How can we help?
Our team is well resourced and experienced in advising companies and not-for profit organisations, allowing you to focus on managing your business during this trying period. We are set up to work from home so you can expect the same level of service, albeit remotely rather than in-person. We have:
- A team of debt advisory and corporate finance experts used to working with banks and other lenders, and can support you with CBILS and CCFF scheme applications. We understand how lenders are currently making credit decisions, and for CBILS loans above £250k particularly can help with your application.
- Our restructuring and insolvency experts can advise businesses under stress about the options available to them.
- Our tax experts will also be on hand to advise you on applications to HMRC for the Time to Pay initiative, for corporate tax advice and R&D tax claims. We also have VAT & Duty experts who can support you in revising your VAT position.
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