Furloughed Staff and R&D Tax Claims – HMRC Give Clarification
Many companies across the UK will have taken advantage of the Coronavirus Job Retention Scheme (CJRS - commonly known as the furlough scheme) since its introduction in April 2020. Under the scheme, workers placed on leave have been able to receive 80% of their pay, up to a maximum of £2,500 a month. Almost 10 million workers who were unable to do their job because of the coronavirus outbreak, have had their wages paid by the government.
Many companies which have taken advantage of the scheme are now considering the impact on their R&D tax relief claims. HMRC have recently released guidance on how furlough payments will affect claims which cover the period where the furlough scheme was operating.
First, we look at payments made to staff where all or a part of those payments have been met by the Government through the CJRS scheme. Under the CJRS one of the key conditions for an employee to be furloughed is that they have been instructed by their employer to cease all work in relation to their employment. From 1 July 2020 it has been possible to be a flexibly-furloughed employee, which allows businesses to bring back employees part-time, but requires the employee to do no work in relation to their employment during a CJRS claim period. Furloughed staff are permitted to undertake study and training. As the furloughed employees have ceased all work during the CJRS claim period HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means that during those times the conditions in s1124(2) CTA 2009 are not been met in respect of their costs. HMRC therefore expect to see these costs excluded from R&D and RDEC claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.
Sickness or Annual Leave
HMRC consider that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is, in effect, part of the cost of their working time. This means that HMRC allows claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time. HMRC consider that any period during furlough which is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation. However, for the reasons outlined above, the staffing costs incurred on leave and sickness during furlough are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies which only claim RDEC it will prevent this element of the staffing cost from qualifying where a company is making a claim in the small and medium size enterprises scheme (chapter 2 of part 13 CTA 2009). The company would however be able to include these staffing costs in a claim for RDEC (s104F to s104H CTA 2009). HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.
In summary, furloughed staff are unlikely to form a significant part of any R&D tax relief claim. Only the time taken as annual leave or sickness (during the furloughed period) will be allowable as part of a claim – and this will be under the less generous RDEC scheme. As a result, many companies will see a significant reduction in their R&D tax relief claims for the accounting period(s) covered by the furlough scheme.
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