EU state aid rules prohibit a company receiving two kinds of state aid at the same time.
Unfortunately for SMEs the R&D tax relief scheme is a form of state aid, as are the various Covid-19 relief schemes, such as the Coronavirus Business Interruption Loan Scheme (CBILs).
Jay Bhatti, Research and Development Tax Manager at MHA MacIntyre Hudson, explains how many SMEs dependent on R&D tax relief to maintain cashflow face a difficult choice because of EU state aid rules
Following confusion over how Covid-19 measures would impact R&D relief, HMRC clarified its policy, which is to disqualify companies using Covid-19 support measures to fund research or development from R&D tax relief under the advantageous SME scheme.
“This will present many SMEs with a dilemma. R&D relief is a vital tool to maintain adequate cashflow, especially for start-ups. If these businesses lack a war chest they will have to take advantage of Covid-19 reliefs to survive, but this means a tough time down the road when their R&D relief is impacted. If they usually rely heavily on R&D relief and can realistically survive the immediate crisis, it may be sensible to forgo the Covid-19 support.
“Even if CBLIS has been claimed only for a portion of the accounting period and it subsidised a cost relating to an R&D project during this time it can make the whole project ineligible for SME R&D tax relief. It may be possible to declare that R&D activities ceased for the duration of the lockdown and use the Covid-19 support measures to subsidise other activities, but this would need to be proved to the satisfaction of HMRC.
“It will still be possible for a company claiming some kind of Covid-19 support to access R&D relief under the R&D Expenditure Credit (RDEC) scheme, as this less generous form of relief is not classed as state aid. Whereas this scheme provides 10p for every pound of qualifying spend, the SME tax relief scheme offers 25p in the pound if the company makes a profit, and 33p if it makes a loss. This makes it especially useful for start-ups that are not yet profitable.”