The impact of furlough on R&D claims
The furlough scheme has been more than just a helpful grant to UK companies – for many companies it has been the difference between surviving and administration, and for staff the difference between holding a job and being made redundant.
The same has been true of companies undertaken research and development in the UK, with it often being the case that those involved in projects seeking to make an advance in technology have been furloughed in order to fend off the worst of the recession.
A common question that has been asked by companies and accountants over the last year or so is whether employees who have been furloughed can have their costs included in R&D tax relief claims. The simple answer to this question is “No” – one of the conditions of eligibility for claiming furlough payments is that the employee does not work whilst on furlough. Consequently, it follows that the employee could not have been engaged in R&D activity during this timeframe. This means that any voluntary or involuntary “top up” pay made by the company also falls outside the scope of eligibility for R&D tax relief purposes.
From July 2020 there has been the option to take flexible furlough. This has meant that employees can work but may have their shortfall in full-time equivalent hours covered by furlough payments. In this scenario, R&D tax relief can be claimed to the extent that the employee has worked as a proportion of full-time hours.
The payments covered by HMRC extended to employer national insurance and pension contributions until 31 July 2020 – both categories of expenditure that are eligible for enhanced R&D relief. Since this date employers have had to cover these payments, so any employees who have worked under flexible furlough arrangements since this date can also claim these costs on a pro-rated basis.
Finally, it is worth assessing the effect of furlough on the PAYE and national insurance cap which covers both the large company (RDEC) scheme and the SME scheme for companies with accounting periods commencing on or after 1 April 2021. Employees will still pay tax on their income from furlough payments, and as mentioned above employer national insurance contributions need to be borne by employers from August 2020. Therefore, it is unlikely that there will be a material impact on R&D claims for companies already affected by the cap, particularly given that companies using the furlough scheme are likely to be claiming less in R&D relief anyway.
If you have any questions about furlough payments, PAYE/NI cap or any other aspects of the R&D tax relief scheme please do not hesitate to contact firstname.lastname@example.org.
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