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Updated Guidelines: Furloughed Staff Payments and R&D Tax Credits

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HMRC have published their latest guidance on how businesses should calculate their furloughed staffing costs in relation to R&D Tax Credits.

The subsidy rules (s1138 CTA 2009)

This part only applies to claims made using the SME R&D scheme.

The Coronavirus Job Retention Scheme (CJRS) is not itself classed as ‘notified state aid’. This means when furlough payments are met by the Government through the CJRS, the specific notified State aid rules at s1138(1)(a) do not apply. However, furlough payments which are met by the Government through the CJRS, are subject to the general subsidy rules at 1138(1). In this case, it is classed as ‘state aid’, therefore the applicant will need to use the RDEC scheme to achieve R&D Tax Credits regardless of size or turnover.

Sickness pay during furlough will be covered slightly differently as we’ll look at below.

The staffing cost rules (s1123 and s1124 CTA 2009)

Employees who have been furloughed must have ceased all work for the company completely during their furlough period. From the 1st July 2020, flexible furlough has been an option, where employees work for the company part time and receive furlough from the Government the rest of the time. Furloughed staff are permitted to undertake study and training during this time.

Furlough and R&D

As the furloughed employees must have stopped working for the company completely (albeit temporarily), HMRC will also assume that they’ve carried out no R&D work during that time either. So when an employee has been furloughed, the conditions in s1124(2) CTA 2009 have not been met in respect of their costs. HMRC therefore stipulates that these costs must be left out of all R&D claims, both under the SME scheme and RDEC. This applies equally to furlough payments provided via CJRS as well as any ‘top-up’ payments made by the company.

What about payments made to furloughed staff outside of the CJRS scheme?

As above, if a staff member is on furlough then HMRC will not allow their costs to be included in an R&D tax relief claim. This is because it is assumed they’ve carried out no work.

If some qualifying activity has been undertaken however, HMRC is allowing companies to claim in the usual way and draw their attention to the appropriate proportion rules found in s1124(3) and (4) CTA 2009.

How will absence from work due to sickness or annual leave be treated?

HMRC considers sickness and holiday pay to be a statutory function of an employee’s contract regardless of COVID-19. Therefore if an employee is on annual leave or off sick during the course of the R&D project, HMRC will allow claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time.

If any staff member takes annual leave or receives sickness pay during a period of furlough, it can also be included in the calculation for staffing costs. However, for the reasons mentioned above, these staffing costs are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies which only claim under RDEC, it will prevent this element of the staffing cost from qualifying where a company is claiming under the SME scheme (chapter 2 of part 13 CTA 2009). However, the company may include these staffing costs in a claim under RDEC (s104F to s104H CTA 2009). In these circumstances, HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs.

Do you have a burning question regarding this update?

If you would like to discuss anything we’ve looked at in this latest update, please do give our R&D tax experts a call. We work solely in the areas of R&D Tax Credits, R&D Grants and other related funding options and will be pleased to discuss these issues in more detail.

Call Myriad Associates on 0207 118 6045 or use our contact form so we can get back to you.


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