Last updated 28/04/20
In these tough times, information is key: this blog explores what you need to know about R&D tax credits during the COVID-19 crisis. It will be regularly uodated.
How are HMRC responding to R&D claim timelines?
HMRC has accelerated their processing effort due to the COVID-19 crisis. At the start of 2020, processing times were 11 weeks for SME tax credit claims, and 7 months for large companies’ RDEC claims. Currently, 95% of SMEs are being processed within 28 days, with payments being made within a further 2 weeks. NOTE: these timescales apply to those companies that put their BACS details on their corporation tax return. If those are omitted, HMRC will make payments via cheques which will extend timescales.
When it comes to tax reduction, overpaid Corporation Tax refunds are being processed and paid within 7 days.
But HMRC is going further, planning to clear the RDEC claim backlog by end April (this is a backlog that only last year was 7 months long). NB In the latest update from HMRC on processing claims, the comment regarding the 80 backlogged claims has been removed, implying that these are now dealt with.
HMRC is processing claims within the service-level agreement guidelines: 28 days and on occassion sooner than that.
One thing you cannot do is ask HMRC to speed up a claim as they are operating with a skeleton staff - most of whom are working from home - and current hold time is 1.5 hours to speak to somebody.
Strong compliance is therefore imperative and it’s absolutely critical to get claims right according to legislation. An HMRC enquiry, however trivial, will take a minimum of 6 months to resolve.
What are the going concern requirements for R&D claims?
A general scheme requirement in order to claim R&D tax relief is that the claimant company must be a going concern. HMRC require this for both those claiming under the SME and RDEC schemes. In order to do so, the latest published accounts must be prepared on a going concern basis, and this status must not depend on the receipt of R&D tax relief or tax credit.
If a company ceases to be a going concern after making a claim, the claim is treated as not having been made.
A company that is in administration or liquidation cannot make a claim for relief.
So with the current environment, is it likely that HMRC will set aside the going concern scheme requirement?
Unfortunately not - this is a statutory requirement which HMRC cannot overlook. However, HMRC will continue to monitor the impact of COVID-19 on a company's ability to meet this requirement.
HMRC are encouraging companies to approach them when they are suffering operational difficulty.
Has there been any change to financial statements and audit requirements?
No, the Financial Reporting Council (FRC) and ICAEW Technical Advisory have confirmed that the coronavirus pandemic does not change any reporting requirements. This means companies need to demonstrate they can survive 12 months from the date of approval of their accounts.
NOTE: It’s important to remember that R&D claims cannot be submitted unless the final accounts are ready for submission to HMRC.
What are the potential effects on R&D claims of liabilities owing to HMRC?
Will R&D claims be paid in full?
Generally HMRC will seek to offset the repayable tax credit against any outstanding company liability. That could include PAYE, VAT, Corporation Tax from earlier periods, and so on. This will all be taken into consideration before issuing any monies to claimant companies.
However, HMRC has now confirmed that VAT deferrals under Covid-19 will not be included in the outstanding liabilities.
Will COVID-19 impact this?
HMRC has not made their position absolutely clear, but they have said they will consider circumstances when processing claims for SMEs. For larger companies making RDEC claims, HMRC are unable to make any changes whatsoever due to current legislation and the automated 7-step process of calculating that credit.
Will the crisis have an effect on HMRC’s Time To Pay arrangement?
These arrangements are agreed on a case by case basis and they can cover any debt that is owed to HMRC.
We've consulted our in-house ex-HMRC inspectors and believe HMRC will be eager to assist and that, where possible, under a Time To Pay arrangement, they may ringfence R&D tax credit and pay that over.
While HMRC has been vague, we will keep you up to date with any progress. It’s important to remember that HMRC want to support businesses and not leave anyone to suffer the ill-effects of late payments and so on.
What state aid is available? And how will it impact R&D?
State aid is available under the Coronavirus Business Interruption Loan Scheme (CBILS). R&D tax relief under the SME scheme is very generous, providing an additional deduction of 130% of qualifying expenditure in computing taxable profit. For loss making SME’s, this can be worth up to 33.35% of the qualifying expenditure and for profit makers, 24.7%. The SME scheme is a notified state aid.
Will CBILS affect a claim under the SME scheme?
Potentially yes. The legislation covering the SME relief (CTA 2009, Part 13) contains an exclusion for expenditure that has been subsidised in any way. Furthermore, if a company is in receipt of a grant or loan which is deemed to be a notifiable state aid and which contributes towards an R&D project, it cannot claim any other state aids.
What is the purpose of the CBILS loan?
Where a state aid has not been allocated to specific expenditure, it should be apportioned on a just and reasonable basis. Of course, different people will have a different view of what is just and reasonable, so the best option is to speak to us about this loan so we can advise based on our knowledge and expertise.
Given that the loan is there to ensure the survival of the business, it might be expected to be applied to more urgent expenditure than R&D, such as operational or production costs. HMRC will be monitoring the application of these new rules, and treatment will depend on the facts.
Who is eligible for advance lending for R&D claims?
There are several providers of advance loans for R&D tax credits. MSC R&D's preferred supplier is Archover who were chosen after an extensive due diligence process - one reason beong that they don't take charges against the business.
What are Archover’s eligibility requirements?
- Evidence of qualifying expenditure from R&D adviser (e.g. MSC R&D as opposed to your own claims)
- Successful claim history of at least 1 year, though this can be negotiable if using MSC R&D
- No HMRC arrears, although there is flexibility during the current crisis
What are the Archover terms of the advance?
- Loans of up to 70% of the R&D tax credit claim value
- Minimum loan value of £100k, so a minimum claim of £140k (though this is now flexible)
- Advance up to 9 months in advance of the expected receipt (possible even before the year-end)
- No charge over the business and no personal guarantees
- 2-3 week turnaround
- 4.8% arrangement fee + 1.1% monthly interest
How can MSC R&D assist at this time?
We recognise that cash is a key priority for many businesses in these uncertain times, and that R&D tax credits can be a vital source of funds.
Our team is in regular contact with HMRC to ensure we can provide our clients with up-to-date advice and guidance - identfying oppportunities and potential short and long-term pitfalls.
Our business is set up to continue to provide the highest quality service, ensuring;
- The highest value R&D tax credit claim
- Minimal time and effort from the client
- Fastest possible timescales
- Total HMRC compliance
- Maximum peace of mind
To help you access the latest information about any of the above, and the R&D grant funding landscape, we've set up our Covid-19 helpline on 0114 263 2632 and our own LInkedIn R&D tax credits Covid-19 Hub group - https://www.linkedin.com/groups/12394150/
Alternatively,for general enquiries about R&D tax credits, we’re available on 0114 230 8401.