As a result of the difficulties faced due to COVID-19, many businesses are looking at ways to improve cashflow. R&D claims under both the SME and R&D Expenditure Credit “RDEC” regimes could be a key way of achieving this for your business. Latest information as well as current pitfalls to be aware of are set out below
“HMRC have confirmed to us that they continue to process claims within their published aim of clearing 95% of SME claims within 28 days from submission”
Rate of Relief
In summary, for every pound of qualifying expenditure:
- A claim under the SME regime attracts relief at a rate of:
- 25p for a profitable company; or
- Up to 33p for a loss making company;
- For an RDEC claim relief is nearly 10p.
Timeframes
HMRC have confirmed to us that they continue to process claims within their published aim of clearing 95% of SME claims within 28 days from submission and are not reporting any delays as a result of COVID-19 (and we are seeing this with our client claims). However, this is always subject to change and it’s possible that there will be an acceleration in businesses submitting claims as they seek cash.
It is also worth noting that whilst 28 days is the processing time, that receipt of payment can take a further 1-2 weeks in order for HMRC to carry out their checks to ensure the payments are being made to the correct company and there are no concerns of fraud; we are seeing payments made within 3 working days at the moment.
Loans : CBILS, CLBILS and Bounce Back
Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loans are all notified state aid.
This means that if a company has obtained one of these loans to specifically fund an R&D project, even if in part, then the whole project becomes subject to the RDEC regime and an SME claim cannot be made on that project. Due to the significant difference in the rates of relief, then it is important to be clear in the documentation as to what the funds are to be used for.
If the funds are to support the general business (such as paying rent, wages, etc., and not to specifically to fund the R&D activity), the application form is clear that this is the case, and the subsequent use of the funds substantiates this, then there should not be any impact on the company making an SME R&D tax credit claim.
VAT Deferral and Time to Pay Arrangements (TTP)
HMRC are treating VAT quarterly payment deferrals between 20th March and 30th June as not being tax owed (it is instead deferred). Therefore any R&D credit will not be offset against these amounts before payment. This is the same regardless of whether the R&D tax credit claim is under SME or RDEC regime.
An arrangement under TTP has always been treated as a liability owing to HMRC and therefore any R&D credit (both RDEC and SME) will firstly be offset against these liabilities before being paid to the company. It is therefore important when setting up the TTP to recognise that an R&D credit will be received or to subsequently notify HMRC that an unrecognised R&D credit will be received. This will enable you to negotiate with HMRC that the R&D credit is not offset in full against amounts owing under TTP and will instead be paid to the company.
Covid-19 Payment Arrangements
However, if a payment arrangement has been reached with HMRC via the Covid-19 Helpdesk (for example for PAYE, Corporation Tax or VAT outside of the above quarterly VAT deferral dates), which has been a much more informal approach to a normal TTP, then HMRC have confirmed that whilst the offset could still take place, in relation to the SME regime they can use their discretion to pay the credits rather than offset them. In our recent experience it seems HMRC are using their discretion and making the full payments to companies.
However, this isn’t the case under the RDEC regime. There are a number of steps as defined by statute which must be followed before a cash payment can be received. One of these steps is that the claim will be used to offset other tax liabilities of the company before the company will receive a cash payment. HMRC have confirmed that they do not have any discretion under the RDEC regime.
Accounting Period change
In order to improve cashflow and bring the payment point sooner, it may be beneficial to shorten the company’s accounting period. This will mean that the claim may be submitted earlier therefore the cash payment will be received sooner.
Alternatively, it may be beneficial to extend the accounting period if there is lots of R&D expenditure just following the year end e.g. extending a March year end to say June. In such a situation, the extra R&D expenditure can be claimed considerably sooner than waiting another 12 months for the next accounting period claim to be submitted.
Furthermore, if the company has moved from a profit position to a loss position due to COVID-19 impact, if a change in the accounting period were to result in a net tax loss for the new period, this can generate a cash payment from HMRC under the SME regime (rather than simply decreasing tax payable).
Thought should be given by any company if considering a change to its accounting period as there may be other implications, e.g. a company is limited to the number of times it can extend its accounting period within a five year period.
Should you wish to discuss anything mentioned above in more detail, please do not hesitate to contact either David Nolan or Sonia Hands
