CBILS and SME R&D tax credits
If the funds you receive from your CBILS loan are not used for R&D then you can still claim SME R&D tax credits on your qualifying expenditure. However, you do need to ensure that your CBILS loan is clearly separated from your R&D spend.
You may find different opinions online, but on May 28th 2020 HMRC clarified how state aid rules affect CBILS loans:
“[CBILS] is notified State aid, meaning that s1138(1)(a) CTA 2009 could potentially prevent a claim for SME relief. We would only expect this to happen where the loan relates specifically to the company’s expenditure incurred on an R&D project rather than providing general support for the company.”
For this reason, we’re certain that our position is correct on the matter.
Separating your CBILS loan from your R&D expenditure
To ensure that HMRC will accept that your CBILS loan wasn’t spent on R&D, you’ll need to provide evidence. That process should start when you apply for your CBILS loan. We recommend the following steps to ensure there is no confusion in your future R&D claim:
- Carefully check the terms and conditions of the CBILS loan. Some CBILS loans may have expenditure conditions attached to them. You should ensure that you are not required to spend your CBILS loan on anything that will form your R&D tax credit expenditure (eg paying staff involved in your R&D claim). If you’re unsure about which costs you’ll use in your R&D claim, read our guide on the subject.
- Where possible, ensure that the intended purpose of the funds (towards ongoing business support and not R&D) is mentioned in your CBILS application.
- Ensure that the same purpose of the loan is also clarified in any other communications eg board minutes.
- Where possible, ring-fence the funds from your CBILS loan from your company’s R&D expenditure in your company accounts.
- Review your record-keeping procedures to ensure that a clear audit trail can be identified for your CBILS funds. This guide from The Balance is a good introduction to effective record-keeping.
CBILS's impact on the RDEC scheme
If you do intend to use your CBILS loan on R&D projects then you can still apply for R&D tax relief. However, you’ll need to apply through the RDEC scheme. The downside of the RDEC scheme is that it is less generous than the SME scheme. RDEC claims return 11-13% of the R&D expenditure versus the potential 33% receivable through the SME scheme.
However, if an RDEC claim allows you to take out a CBILS loan and continue your current R&D efforts, then it may be worth pursuing. We recommend getting in touch if you want to understand which path is most suitable for your business.
Other coronavirus schemes’ impact on the SME R&D tax credit
The Bounce Back Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme follow the same state aid rules as CBILS. The above considerations should therefore apply when making an application for loans under these schemes. However, the Future Fund is not subject to the same constraints as it does not count as notified State Aid; it is instead a commercial loan. From HMRC:
“[Future Fund loans] are not State aid, they are not caught by s1138 CTA 2009 and they need not be considered when looking at the State aid cumulation rules.”
The uncertainty around the impact of these schemes on the R&D tax credit scheme has made it clearer than ever that effective record-keeping and clear accounting practices are vital when managing your firm’s financial position. It’s also reconfirmed the importance of having clear guidance to ensure your firm is not penalised due to misinformation or ignorance.
As always our team of industry-leading R&D credit advisors can help you determine the best course forward. So feel free to get in touch.