Tax Advisory Manager Chris George discusses a valuable tax relief for companies looking to improve their cashflow during these unprecedented times.
Many businesses are currently engaged in trying to survive; looking to ensure that their business can weather the current pandemic and emerge in a stronger position. Managing cash flow has perhaps never been more important. One valuable area for unlocking cash for companies is the Research & Development (R&D) tax credit system. This is often overlooked and not considered a high enough priority to consider investigating. However, with the benefits that this relief can provide, it is certainly something that should be considered in much more detail during the current climate.
R&D Tax Relief is a government-backed relief designed to encourage companies to engage in R&D activities which advance the current state of science or technology. As well as offering enhanced tax relief on qualifying expenditure, loss making SME companies can surrender the additional tax relief obtained for an immediate repayment from HM Revenue and Customs (HMRC). This repayment can provide an invaluable boost to a company’s cashflow.
In April, HMRC confirmed that they are still meeting their published aim of clearing 95% of SME R&D claims within 28 days and have applied additional resources to maintain this. In the 2017/18 year, the average R&D claim in the East of England was £115,000, proving that this relief can provide reasonably quick cashflow advantages.
While for large company RDEC schemes, HMRC have no discretion under the legislation and have to take into account any other outstanding tax liabilities before making a repayment to the company, for SME claims there is greater flexibility and HMRC are currently considering the position.
It is also worth stating that a liability which has been deferred, such as the most recent quarterly VAT liability, is not treated as being outstanding and is not taken into account for these purposes. Any business with a ‘Time to Pay’ arrangement with HMRC is however considered to have a liability outstanding.
As R&D tax relief is a government backed initiative to promote additional R&D activities, it therefore qualifies as State Aid. European rules dictate that a company cannot be in receipt of two sources of State Aid for the same expenditure. HMRC have confirmed that the Coronavirus Business Interruption Loan Scheme (CBIL) is notified as State Aid and therefore could fall within these restrictions. However, this should only apply where the company uses the financial support under the CBIL to specifically fund their R&D activities. Where the CBIL funds are used to more generally support the business, there should be no restriction on the R&D relief available.
Recently released data published by HMRC shows that companies in the East of England benefitted from around £555 million in tax relief and tax credits through the R&D system in the 2017-18 year. This represents a huge opportunity for businesses who are currently looking at cashflow possibilities to benefit from expenditure which has already been incurred.