More than 9.6 million people in the UK have been furloughed using the Coronavirus Job Retention Scheme (CJRS) – many of these at companies that rely on R&D tax credits to power their innovation.
A substantial part of any R&D tax claim is likely to be the staffing costs for directors or employees directly and actively engaged in relevant research and development (R&D).
HM Revenue & Customs (HMRC) has provided clarity now on how staffing costs will qualify for tax relief if staff normally engaged in R&D activities have been furloughed as a result of the Coronavirus pandemic.
A key principle of the early furlough scheme was that all work for the employees affected must stop. Obviously, HMRC considers that those employees cannot be regarded as being directly or actively engaged in relevant R&D during those times – especially as suggesting that they did work could lead to questions about the grants received.
This also applies equally to any ‘top-up’ from the company itself to boost the earnings of those furloughed and in receipt of only 80 per cent of their normal wage.
However, from 1 July 2020 until the scheme ends on 31 October 2020, it has been possible for employees to return to work part-time under the CJRS.
This flexible arrangement has allowed staff to be paid by their employer for the time they do work and still receive financial support for the time they are not at work via the CJRS because they are furloughed. HMRC has confirmed that the hours where the employee is not furloughed do count as qualifying expenditure.
Of course, in some cases, staff have been furloughed or put on short time working arrangements and not been provided with a grant under the CJRS.
In these cases, costs can only be claimed if some qualifying R&D activity has been undertaken. Business must account for the appropriate proportion of work under the R&D tax legislation.
Businesses must also consider holiday and sick pay during furlough. HMRC says that these are a necessary cost of employees undertaking R&D work and is, part of the cost of their working time.
Therefore, HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs for holiday and sick pay.
Payments during gardening leave, payments in lieu of notice or redundancy will not qualify for relief under the R&D tax relief schemes. However, bonuses and one-off payments can be included in staffing costs to the extent that they meet the attribution rules.
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