Impact of Government-Backed Loan Schemes on your Claim

By Caroline Walton, Technical and Operations Director

There are a number of Government-backed loan schemes and financial support measures to help companies survive the Coronavirus pandemic and support the economy. Funding schemes include the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Future Fund (FF).

Statistics concerning the amount of funding released through these schemes and the numbers of applicants are released by HM Treasury every week and show a huge take-up of the help available. As at 26 August 2020, there have been 115,941 applications for CBILS and £12.65bn of funding approved; 872 applications for CLBILS and £3.10bn of funding approved; 1,349,051 applications for BBLS and £33.68bn of funding approved and 816 applications for FF with £512.9m of funding approved.

In addition to these, the Government has introduced the Coronavirus Small Business Grant Fund (SBGF0), the Coronavirus Local Authority Discretionary Grants Fund (LADGF), Covid-19 Corporate Financing Facility (CFF) as well as ways to defer existing financial liability during the pandemic which include the Coronavirus Job retention scheme, deferral of vat payments due to coronavirus and deferral of payment of business rates. For businesses that are Innovate UK award recipients, there is additional support through grant funding.

During the last few months, the priorities for most businesses unable to trade have been cashflow and how to pay immediate liabilities. Most businesses applying for grants and funding will not have given any thought to how the receipt of grants and funding might affect a future claim for R&D tax credits and it is unlikely that this information will have been provided by the lender.

At the last meeting of the Research & Development Consultative Committee meeting on 14 July 2020, HMRC took the opportunity to state the position as regards the impact of Covid-19 grants & funding, on future claims for R&D tax credits.

In addition to these, the Government has introduced the Coronavirus Small Business Grant Fund (SBGF0), the Coronavirus Local Authority Discretionary Grants Fund (LADGF), Covid-19 Corporate Financing Facility (CFF) as well as ways to defer existing financial liability during the pandemic which include the Coronavirus Job retention scheme, deferral of vat payments due to coronavirus and deferral of payment of business rates. For businesses that are Innovate UK award recipients, there is additional support through grant funding.

During the last few months, the priorities for most businesses unable to trade have been cashflow and how to pay immediate liabilities. Most businesses applying for grants and funding will not have given any thought to how the receipt of grants and funding might affect a future claim for R&D tax credits and it is unlikely that this information will have been provided by the lender.

At the last meeting of the Research & Development Consultative Committee meeting on 14 July 2020, HMRC took the opportunity to state the position as regards the impact of Covid-19 grants & funding, on future claims for R&D tax credits.

HMRC`s position is that in the majority of cases, receipt of a CBIL or BBL will have no impact on a company`s ability to make a claim for R&D tax credits or on the claim itself. However, any potential impact depends on the nature of the funding received and whether it has been used to pay for the expenditure incurred in an R&D project and in this regard, it is useful to remind oneself of the rules.

If a company receives funding which is a Notified State Aid (NSA) and the money has been spent by the company on non-R&D matters i.e. general financial support for the business, then the fact that an NSA has been received will have no impact on the company`s claim for R&D tax credits.  HMRC suspects that this will be the case for the majority of companies hence their comment.

If, however, a company has received an NSA and used it to pay for all or part of the expenditure incurred in an R&D project, there will be an impact on the claim for R&D tax credits. In this scenario, the company will be unable to claim tax relief for all the expenditure incurred in the R&D project in question under the R&D SME scheme. Relief must be claimed under the Research & Development Expenditure Credit scheme (RDEC) instead. The reason for this is that the R&D SME scheme is a Notified State Aid itself and the rules prohibit a company from being able to benefit twice from a Notified State Aid for the same R&D project.

The other possible scenario concerns the situation where a company has received funding which is not an NSA, but the funding is nevertheless used to pay for the expenditure in an R&D project. In this scenario, the company will be unable to claim tax relief for the subsidised expenditure under the R&D SME scheme because again, the rules prohibit it.  Relief for the subsidised expenditure must be claimed under RDEC. If the R&D project expenditure comprises a mixture of subsidised and non-subsidised expenditure, relief should be claimed under the R&D SME scheme for the non-subsidised expenditure and under RDEC for the expenditure which is subsidised.

When assessing the impact of grants and funding received by a company on a potential claim for R&D tax credits, the key is to determine the nature of the funding, its purpose and how it has been spent.

Whether or not a grant or funding is an NSA can, of course, be advised by the lender. Government-backed loans such as CBILS, CLBILS, BBLS and certain selective grants restricted to specific industry sectors e.g. Retail, Hospitality & Leisure Grant Fund (RHLGF) are known to be NSAs as well as Continuity Grants and Loans and Fast Start Grants provided by Innovate UK. The Future Fund, Coronavirus Job Retention Scheme, Time to Pay arrangements, VAT payment deferrals and Business Rates relief are not NSAs.

The Government has classified the Small Business Grant Fund (SBGF) as de minimis state aid. Where a loan or grant is classed as de-minimis, only the subsidised amount which is used for the R&D project will not be claimable under the SME scheme.

The R&D tax specialist must identify whether a company has received an NSA or other funding type which has been used to fund R&D project expenditure when preparing a claim for R&D tax credits. It is also essential that companies themselves know about the potential impact that NSAs and subsidised expenditure can have on an R&D claim when making the application for funding in the first place.

Whilst cashflow will have been the immediate priority for many companies in the months following March 2020, the easing of the lockdown may now provide time for many companies who still require funding to reflect on the implications that the funding might have on any future claim for R&D tax credits. Potential pitfalls can be avoided by careful drafting of loan/grant application documents and an internal audit trail to evidence that the money has not been used to pay for R&D project expenditure.

For further information and advice on how to make sure that any application for funding does not inhibit a future claim for R&D tax credits, please do not hesitate to contact us.

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