Alert – SME R&D tax relief & CIBLS – A problem?

John Moore, April 3rd, 2020 John Moore

Will you lose the SME scheme R&D tax Relief if you access the CBILS?

Following the introduction of a package of measures providing additional support for businesses many SME companies will be looking at whether they need to, or are able to, access the recently introduced Corona virus Business Interruption Loan Scheme (CBILS). This is designed to enable SME’s to access bank loans with the government  covering the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments. The government is also providing lenders with a guarantee of 80% on each loan to give lenders further confidence in continuing to provide finance to SMEs.

Clearly this could provide a cash flow lifeline to many SMEs struggling to weather the business storm caused by the restrictions introduced to mitigate the effect of the COVID-19 virus.

This support scheme has been classified as a Notified State aid with the EC approving the use of it on 25th March 2020. However this may adversely impact on the ability of SMEs receiving such support to claim under the SME scheme for R&D tax relief.

Background

The SME scheme for R&D tax relief is available to companies incurring qualifying costs performing qualifying R&D. It provides companies claiming it with an additional 130% tax deduction on the amount of qualifying R&D expenditure. For companies not paying corporation tax there is the opportunity to claim cash back from HMRC. This can be a vital source of finance for technology SMEs. For a company paying tax, this could currently be worth an additional tax reduction of 24.7% of the qualifying spend. For loss making companies the payable cash tax credit is currently 33.35p for every £1 of eligible R&D spend.

The issue

Because the SME R&D scheme is itself a Notified State Aid (NSA), where an R&D project is in receipt of another NSA in respect of the whole or part of the qualifying expenditure or in respect of any other expenditure attributable to the same R&D project then none of the expenditure on that project can qualify under the SME scheme.

The project expenditure may instead be able to be claimed under the less generous Research and Development Expenditure Credit (RDEC) scheme but the range of qualifying costs may be restricted for an SME and the tax relief benefit is only around 10% of qualifying expenditure.

The problem

In the first official figures released since the original CBILS scheme was launched last week, the government have confirmed that more than £90m of loans to nearly 1,000 small and medium-sized firms have been approved so far.

The scheme has fielded more than 130,000 enquiries from businesses, with a current total of 983 applications for finance approved, according to latest figures from UK Finance.

Companies that have previously claimed the more generous SME scheme tax relief may find that they will be unable to claim this in the future if they have received a CBIL that supports the R&D projects.  This could potentially cause a significant reduction in the amount of R&D tax relief and planned cash flow in the future.

Following requests for guidance on whether the receipt of a CBIL will prevent companies from accessing the SME relief that they are used to or expecting, HMRC have confirmed that that the CBILS measure is a fully notified aid so the restriction on claiming under the more generous SME scheme potentially applies, if the CBILS relates specifically to the company’s R&D expenditure on a project rather than being intended more generally to support the company. HMRC have said that this will depend on the facts and that they will be monitoring the application of this rule.

Our view

This potential problem appears to be an unintended consequence of the rapid introduction of the support for business in the face of the necessary restrictions on business to curb the effects of COVID-19. However at present the threat to SMEs taking a loan under CBILS and claiming SME R&D tax credits, together with the planned cash flows, is a real one. The HMRC guidance implies that care must be taken to understand the purpose for which the CBILS loan is taken out if the company is not to experience an adverse and unexpected result when it comes to making an R&D claim after the company’s year end. We recommend that you take advice before applying for the CBILS if you are also intending to claim the SME R&D tax relief.

If you would like to discuss this further then please contact John Moore on 0207 292 8850 or at john.moore@kinglybrookesllp.co.uk

This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.