Can I claim R&D tax relief for furloughed staff?

Posted on Wednesday 16 September 2020 by Vanessa Cooper | Group Technical Tax Manager

We have had some clarification from HMRC on how companies furloughing staff deal with claims under the SME R&D tax relief or Research and Development Expenditure Credit (RDEC) schemes. It’s important to realise that the rules are different under each of these schemes. But also that small and medium enterprises can claim under the RDEC scheme.

Furloughed employees can’t be engaged in R&D activity

One of the key conditions of The Coronavirus Job Retention Scheme (CJRS) is that a furloughed employee must have been instructed by their employer to stop all work for that employer. Even when employees have been flexibly-furloughed they mustn’t do any work in relation to that employment during a CJRS claim period. (Although furloughed staff are permitted to undertake study and training.)

So as the furloughed employees won’t be working during the CJRS claim period, then HMRC consider that they can’t be directly or actively engaged in relevant research and development during those times. HMRC will expect to see these costs excluded from R&D and RDEC claims. This applies to furlough payments met under the CJRS and also to any ‘top-up’ from the company itself.

The rules are the same whether the furlough payment has come from government or not

There may be times when furlough payments have been made to staff but none of those payments have been met by the government through the CJRS scheme. But the same rules apply. Where furloughed employees have stopped working then they can’t be regarded as being directly or actively engaged in relevant research and development. If some qualifying activity has been carried out then HMRC would expect companies to claim in the usual way and draw their attention to the appropriate proportion rules.

The exception is around sickness or annual leave

HMRC recognises that paying holiday pay and sick pay is a necessary cost of employees undertaking R&D work so is, in effect, part of the cost of their working time. This means that HMRC do allow R&D tax relief claims to evaluate holidays and sickness in the same way as working time when establishing qualifying activity. Any period which is taken as annual leave, or is recorded as sick leave, during furlough can be included in the staffing cost calculation.

In addition there are subsidy rules which apply to the SME R&D scheme, but not the RDEC scheme

CJRS is not a notified State aid, so when furlough payments are met by the government through the CJRS it doesn’t trigger the specific notified State aid rule.

However, and importantly, the general subsidy rules do apply. This means that the expenditure has to be treated as having been subsidised and will therefore not qualify in the SME scheme.

Under the SME R&D tax relief scheme you can’t claim for any staffing costs during furlough

Staffing costs incurred on leave and sickness during furlough are subsidised if the government is meeting these costs under the CJRS. This will prevent this element of the staffing cost from qualifying where a company is making a claim in the SME scheme. But it doesn’t affect a claim under RDEC.

An SME would be able to include these staffing costs for sick and leave, under RDEC. HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

Seek specialist help

For most companies this is a new area. How many of us would have considered furloughing staff or seeking government support at the beginning of the year?

In normal times 80% of R&D tax claims are made up of people’s time so it’s important to seek advice and get this right. The financial benefit of claiming R&D tax credits is more important now than ever and it’s important that your claim is maximised but essential that it’s also compliant.

To find out more please contact us.

GovGrant R&D tax relief

About Vanessa Cooper | Group Technical Tax Manager

Vanessa Cooper | Group Technical Tax ManagerVanessa has over twenty years of accounting experience and works closely with our clients to identify R&D, Patent Box and RDA opportunities. She provides technical training to our internal teams and our partner accountants, ensuring that everyone at GovGrant delivers to rigorous accounting standards. View profile