HMRC publish guidance on R&D staffing costs for furloughed employees.
HMRC have published guidance on their expectation of how research and development (R&D) relief claimants should treat staff costs for employees who have been furloughed. Broadly the R&D tax incentives, both the small and medium sized businesses (SME) regime and R&D credit (RDEC) regime for large businesses, are ‘activity based’ and HMRC expect staff costs for furloughed periods to be excluded from R&D incentive claims given staff are not engaged in R&D activity while furloughed.
For companies that have claimed funding through the Job Retention Scheme (JRS), there was a requirement, up to 30 June 2020, for furloughed employees to cease all employment activities with the exception of training and studying. Therefore, it seems likely that there will be no time spent on R&D activity for that period.
From 1 July 2020, with the introduction of flexible JRS arrangements, where employees have undertaken employment activity that is attributable to R&D, then a claim for the R&D related staff expenditure should be made in the usual way. Where companies have not claimed JRS support but have furloughed staff, then HMRC’s view is that an R&D claim should only be made for actual employment activity attributable to R&D.
HMRC have indicated that they will accept staff costs attributable to holiday or sick leave to be considered as part of the overall remuneration of an employee and they can therefore in part be attributed to the R&D activity. For example, if during a 12 month period an employee received pay in total of £5,000 attributable to holiday and sick leave (including the furloughed period) and that employee spent 25 percent of their time on R&D then £1,250 of the holiday and sick pay can be included within the R&D claim. The furloughed period (with the exception of holiday and sick leave) should be treated as time that the employee is available to work i.e. the 25 percent above should be calculated including the furloughed period as time that the employee is available to work.
A point to note is that the JRS funding is not notified State aid but would be considered a subsidy. This would mean that for SME claimants any inclusion of staff expenditure within an R&D claim that has been subsidised via JRS, should be claimed under the RDEC and not the SME scheme.
In light of this guidance, it is key that R&D claimants think through carefully the implications of furlough on claiming R&D staff expenditure, especially where they have been the recipient of JRS grants given the stringent constraints over what furloughed employees were able to do during the furlough period.
In addition, HMRC have published guidance on their expected approach to one-off payments of remuneration including redundancy payments and bonuses. HMRC’s view is that bonuses should only be included where the payment is attributable to the underlying R&D activity and where the bonus is linked to R&D activities carried out as part of the employment they should be included in the claim. Regarding redundancy payments for gardening leave, HMRC would typically expect these to be excluded from the claims. We would advise that claimants consider what the payments represent and whether they are attributable to any R&D activity prior to inclusion in the claim.
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