Can I Claim R&D Tax Credits for Furloughed Employees?

With thousands of businesses taking advantage of the furlough scheme, GrantTree explains how this popular programme will impact your R&D Tax Credits claim. 

The Coronavirus Job Retention Scheme (CJRS) – or ‘furlough scheme’ – has been used almost 10 million times since it went live in March.

Scores of R&D Tax Credit-eligible businesses have benefited from this initiative, protecting countless jobs in the science, tech, engineering and construction sectors.

And many more companies are likely to make use of this programme now that the government has extended it until March 2020.

But as businesses approach claim time – many relying on their credit to extend their cash runway – they are wondering how the Furlough Scheme subsidies will interact with R&D Tax Credit legislation.  

Thankfully, HMRC has issued concrete guidance on this issue. We have broken it down below. 

R&D Tax Credits and furloughed staff

Under the CJRS scheme, once an employee has been furloughed they must cease all work for their company. This means they cannot participate in research and development activities, either directly or indirectly. 

As furloughed staff can’t meet the Corporation Tax Act’s requirements for being “directly and actively engaged in relevant research and development”, costs associated with their time are ineligible for R&D Tax Relief. 

In other words, businesses should not claim R&D Tax Relief on staff costs associated with furloughed employees during their furlough period.

This applies to both CJRS subsidies and top-ups, meaning salary paid to furloughed staff on top of the government aid. 

Exception for holiday and sick time

There is one exception, however. 

HMRC recognises that holiday and sickness are inevitable parts of staff involvement in development work. For this reason, the agency lets companies claim tax relief on this time by recording it as a staff cost.

HMRC is applying this same logic to employees on furlough.

This means if an employee takes holiday or is sick while on temporary leave, their staff costs incurred during this time are eligible for R&D Tax Relief. 

The slight nuance is that the portion of an employee’s costs which are subsidised by the Furlough Scheme during this sickness and holiday must be claimed via the RDEC scheme.   

This is because CJRS payments are considered a government subsidy and are subject to general subsidy rules. Therefore, they cannot be claimed under the SME scheme. 

Employers can claim ‘top-ups’ under the SME scheme, assuming the employer qualifies.

Should I claim R&D Tax Relief for holiday and sick time for furloughed staff?

This is not a loophole. HMRC has specifically said that companies are allowed to claim for furloughed staff that take holiday or receive sickness pay. 

The agency says it will “accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.”

Assuming usual practices around holidays and sick pay, we interpret this to mean that companies should only claim holiday and sick time for furloughed staff that would otherwise be working on R&D projects. 

Where it’s hard to judge, we suggest claiming for employees who have been involved in development work before they were furloughed. 

Questions?

If you have any questions about claiming for furloughed staff, don’t hesitate to get in touch!

Our tax credits experts would be happy to help you on this or any other part of your claim.