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  • State aid and R&D – How do the two affect each other?

    30 April 2020

    “If I am furloughing my R&D staff will this impact my R&D claims?”

    The furlough scheme is predicated on the condition that staff cannot be doing work for a company while being on furlough. On that basis staff cannot do R&D work while on furlough. So the furlough scheme and covid-19 will reduce the amount of R&D being done by companies.

    But as this state aid is not for an R&D project, it is conditional on not working it does not impact R&D claims in anyway. If a staff member is costing (his salary plus employers NIC and employers pension contributions excluding benefits in kind) a company £50k a year and normally spends 70% of his time doing R&D in a year and is furloughed for 3 months then the time he is working for the company is 75% of the year (9 months out of 12 months).

    25% of the £50,000 is £12,500, so this non-R&D element needs removing as it is not an R&D activity. Under furlough the maximum a staff member can be “paid” is £2,500 a month anyway.

    If the employee spends 70% of his working time doing qualifying R&D the claim will be for £37,500 * 70% = £26,250. None of the £37,500 is a state aid. The state aid is for “not” working and is not eligible to claim. Furlough is not a claimable R&D activity, it is inactivity.

    Without the covid-19 emergency the claim would have been: £50,000 @ 70% = £35,000.

    Compliance concern.

    Claimants will have to be careful to claim the correct costs relating to R&D activities during this period. Even firms not using the furlough scheme may well be doing less R&D and be more focused on “survival” and bringing in income through commercial activity.

    So, a question everyone will have to ask when looking at R&D claims covering the covid-19 period is “how much R&D was really being done?” None of the key R&D legislation, guidelines, or deadlines have changed. HMRC will expect these “rules” to be followed and for claims to be constructed correctly.

    Investment concern.

    When the national statistics for this period come out, we are likely to see a drop in R&D claimable expenditure as R&D activity will be less. The government should look at this as R&D fuels growth.

    We need R&D investment to get out of this “mess”, fund the NHS, and to start to deal with the “butchers bill” of debt the crisis has accumulated.

    Answers are not straightforward as state aid is limited at present by EU legislation and competition laws, plus in itself increases debt. The Future Fund is an attempt to address this along with increased Innovate UK funding.

    But as an R&D consultancy that has helped clients gain over £136 million in funding through R&D claims it is hard to view a £550 million funding increase to Innovate as anything other than being a piecemeal gesture when compared to size of the UK economy.

    But it is very easy to identify problems and much harder to solve them.