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HMRC guidance on R&D tax relief and furloughed employees

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HMRC has confirmed how costs relating to furloughed employees should be treated for the purposes of the R&D tax relief schemes.

Staffing costs for directors or employees directly and actively engaged in relevant research and development (R&D) are one category of expenditure qualifying for relief under the R&D tax relief schemes.

HMRC has now set out its view on whether staffing costs will qualify for R&D tax relief where the staff normally engaged in R&D activities have been furloughed as a result of the coronavirus pandemic.

Treatment of furloughed employees where CRJS grant is claimed

As one of the conditions for claiming a coronavirus job retention scheme (CJRS) grant is that all work ceased during a claim period, HMRC considers that those employees cannot be regarded as being directly or actively engaged in relevant R&D during those times. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.

Since 1 July 2020, it has been possible for employees to return to work part-time under the CJRS, however the rules still required the employee to do no work in relation to their employment during a CJRS claim period.

Employees furloughed, but no CJRS grant claimed

Where staff have been furloughed, but grants have not been claimed under the CJRS, costs can only be claimed if some qualifying R&D activity has been undertaken. Account must be taken of the appropriate proportion rules (s1124(3) and (4), CTA 2009).

Holiday pay and sick pay during furlough

HMRC considers that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is, in effect, part of the cost of their working time. Although HMRC will allow any period during furlough which is taken as annual leave or is recorded as sick leave to be included in the staffing cost calculation (applying the usual apportionment between qualifying and non-qualifying activities), the rules for subsidised expenditure come into play under the SME R&D tax relief scheme where staffing costs incurred on leave and sickness during furlough were met by the CJRS.

HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

Other one-off payments to staff, including redundancy payments

Payments during gardening leave or payments in lieu of notice will not qualify for relief under the R&D tax relief schemes as the employees cannot be regarded as being directly or actively engaged in relevant R&D.

Bonuses and other one-off payments should only be included in staffing costs to the extent that they meet the attribution rules (s1124, CTA 2009).

HMRC considers that as redundancy payments are not emoluments, in accordance with Nichols v Gibson (68 TC 611), these are not qualifying staffing costs.

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