You cannot claim R&D tax credits for the hours that your staff were on furlough. This applies to both the RDEC and SME R&D tax credit schemes. This also applies to any proportionate staff costs, such as pension and NI contributions.
Prior to 1st July 2020, furloughed workers were not able to work at all. Therefore any furloughed staff would not have been conducting R&D. On 1st July 2020, however, the government introduced “flexible furlough”. Flexible furlough meant that your workers could work part-time, with only their furloughed hours being subsidised by the government.
As a result, those workers may have worked on R&D projects part-time. You are therefore able to claim for the hours spent on R&D projects, but not for the hours spent on furlough.
Do state aid rules apply to furlough payments?
Furlough payments are a general subsidy under section 1138 of the Corporation Tax Act of 2009. They are not technically a notified state aid, but they have the same effect on your R&D tax credits.
That means that if an R&D project has any cost-association with furlough payments, then that project cannot qualify for the SME R&D tax credit. Instead, you will need to claim all the expenditure for that project using the less generous RDEC scheme.
You should clearly separate both the furloughed employees and the furloughed hours from the R&D project in question. Additionally, you should clearly account for the money received from the furlough scheme payments, showing that the funds did not contribute to your R&D projects. You should demonstrate a clear separation of both the furloughed employees and payments from your R&D projects. If you do this clearly, then your use of the furlough scheme will not adversely affect your SME R&D tax credit claim.
Accounting for furlough payments and R&D tax credits
The furlough payments you receive from the government count as gross income and are therefore subject to Corporation Tax. If adequately separated, they should have no impact on your staff costs. Staff costs will remain qualifiable expenditure under the R&D tax credit scheme.
Of course, you will need to apportion the time your employee worked on R&D, and claim staff costs against that time. This is particularly crucial if your staff were on flexible furlough. Any costs claimed by your SME R&D tax credit claim cannot have been recouped by your furlough claim. If you funded any of your R&D with your furlough payments then it would jeopardise all the expenditure for that R&D project, and HMRC would need to push the claim through to the RDEC Scheme.
Claiming R&D tax credits for sick leave and annual leave
When apportioning the hours worked by part-time furloughed staff, you can claim against any sick pay or annual leave taken during the period. As a result, you’ll need to clearly identify the hours that were subsidised through the furlough scheme, the hours the employee worked on the R&D project, and any hours claimed as sick pay or taken off on paid annual leave. The latter two of these can form part of your qualifying R&D expenditure.
Can I claim R&D tax credits and the Coronavirus Statutory Sick Pay Rebate?
If you claimed the Coronavirus Statutory Sick Pay Rebate (CSSPR) for the time your employee took off ill, then you cannot claim R&D tax credit for those days off. The CSSPR rebate “is a notified state aid”. As a result, you need to clearly separate these payments from your R&D project. Otherwise, you will need to submit a claim for the project via the less generous RDEC scheme.
Claiming R&D tax credits and other coronavirus funding
The company-focused loan schemes such as CBILS and Bounce Back Loans count as notified state aid. As a result, you’ll need to separate those funds from your R&D expenditure to ensure a successful SME claim.
Future Fund payments count as a commercial loan and are not subject to state aid rules.