CJRS claims starting to impact R&D calculations
Further to our previous blog on this subject, we have started to see R&D claims coming through that are being impacted by the use of the Coronavirus Job Retention Scheme (CJRS).
Companies with financial year ends after 1 April 2020 who normally make R&D claims may well be on their way with their year end accounts and tax work, and this should include assessing how the CJRS claim impacts the R&D calculations.
At first glance, this should be quite straightforward, but for those companies with a larger workforce, high paid R&D staff or those making use of the flexible furlough scheme, the calculations can prove to be quite complex.
It may seem sensible to simply offset the furlough payments against the wage cost for each staff member, but this doesn’t give the full picture in a lot of cases and we would recommend undertaking a more thorough analysis to avoid HMRC challenge, as factually, staff members cannot be carrying out R&D activities if they are on furlough.
A company with a September year end has a project engineer who is heavily involved in R&D and would normally spend 80% of their time on R&D activities in the course of a normal year.
Their annual cost to the company is £100,000, resulting in £80,000 eligible R&D expenditure and almost £20,000 tax relief for the company each year.
Due to cash flow concerns as a result of the covid pandemic, the staff member is placed on furlough from 1 April 2020, then brought back part time (flexibly furloughed) for three days per week from 1 July 2020 until after the year end.
The company could potentially have claimed up to £2,500 per month for this staff member (less when flexibly furloughed) – let’s say they received CJRS payments totalling £10,000 for the 6 month period.
Simply offsetting the grants received (£10,000) against the engineer’s annual cost would leave £90,000 in the R&D calculations, suggesting the engineer was available 90% of the time for R&D activities (resulting in a claim for £72,000 based on 80% of their available time, and tax relief of c£17,700).
Clearly this is not the case and the engineer was actually only available for 65% of the year in total. This would result in only £65,000 of their time being eligible, giving rise to £52,000 R&D time at 80%, and tax relief of c£12,800 – a significant reduction to the normal claim.
How will this impact claims?
While the above example is fairly straightforward, the varying furlough scheme and different arrangements that employers were using at the time to protect their business may create additional complexity.
In practice it is likely to be necessary to get the detailed records of the specific days staff were on furlough and to use those as the basis of the calculations of the percentages of the time that those staff were actually carrying out R&D.
The furlough payments may also then need to be included in working out what the qualifying cost was for that person.
We expect HMRC will be watching this quite closely given the cost of the CJRS scheme, they have records of who has claimed and which employees this is in respect of and it would be quite an easy way for them to challenge the size of a claim.
In cases where companies have multiple highly paid staff on furlough (with differing arrangements) the work to ascertain the impact on the R&D claim could be significant.