R&D staffing costs during COVID-19 – the devil is in the detail

04 February 2021

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Staffing costs are a major element of most R&D claims and, in our experience, providing HMRC with meticulous analysis of staff costs and time spent on R&D work is vital to ensure the qualifying cost to the business is claimed.

HMRC’s Corporate Intangible and Research and Development manual provides detailed guidance on what staff costs can be claimed and this explains the interaction between the Coronavirus Job Retention scheme (CJRS/furlough) and R&D relief claims.

The furlough rules

Employees that are placed on furlough are not permitted to ‘work’ during any furlough period (under the initial scheme to 30 June 2020) or on days for which furlough payments are claimed under the ‘flexi-furlough’ scheme since 1 July 2020. Therefore, HMRC states that they cannot be taking part in qualifying R&D activity and so furlough payments will not be qualifying staff costs. For the same reason, employer costs to ‘top up’ a furloughed employee’s wages would also not qualify. HMRC points out that even if an employee was put on furlough but the employer did not claim for the individual’s pay through the CJRS, that individual will still be expected to have ‘ceased work’ so the related staff costs are unlikely to qualify as R&D costs as the individual cannot be taking part in qualifying R&D activity.

Where an employer has described an employee as ‘furloughed’ but not claimed for his or her salary under the CRJS, if qualifying R&D work was actually carried out by that individual, then the appropriate proportion of the individual’s staff cost could be claimed. Note that where a furloughed employee has worked during a furlough period and the employer did claim for their wages under the CJRS, that part of the CJRS claim would be invalid and the employer must report this to HMRC by 20 October (or within 90 days of the payment if later) – read more on CJRS errors, tax clawback and penalties.

Training, holiday and sick pay

While the rules above are fairly straightforward, the position is complicated by the fact that individuals can undertake training while on days of furlough. Similarly, individuals can take holiday and sick leave while on furlough (although employers must not put individuals on furlough simply for their holiday absences). Read more on the CJRS.

HMRC has long accepted that qualifying staff costs relating to R&D can include the relevant individuals’ holiday pay and sick pay and this must be apportioned the same way, for example, 63% qualifying R&D work, 37% non-qualifying based on a time apportionment. HMRC’s new guidance sets out that:

“Any period during furlough which is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation.”

i.e. periods of sick or holiday pay during furlough can be apportioned in the same way for employees engaged in R&D work before/after furlough (but see below for statutory sick pay rebates). While this seems a relatively sympathetic approach, HMRC’s guidance does go on to make clear that redundancy payments or pay in lieu of notice (PILON) are not regarded as relating directly or indirectly to qualifying R&D activities so such costs must be excluded. 

Time spent on training related to R&D project would normally be treated as a qualifying and included in staff costs calculation and, as training does not breach the furlough rules, we would expect cost relating to relevant furlough period training to qualify (although HMRC’s new guidance is currently silent on this specific point).

EU state aid

One final complexity is that the CJRS payments, while not treated as EU state aid, are regarded as a government subsidy. Therefore, should an apportioned part of furlough period staff costs be claimed (ie for holiday or sick pay) a qualifying SME could not claim relief for that element of staff costs under the SME scheme: relief on that small element of costs would have to be claimed under the RDEC.

However, claims under the Coronavirus Statutory Sick Pay Rebate Scheme are classed as EU state aid. Therefore, you cannot include the staff costs for a worker in an R&D claim if you have previously claimed under the CSSP rebate scheme for that worker’s period of sickness. So it is important to check sickness records for R&D staff when compiling R&D claims – although this must, of course, be handled carefully with your HR team to protect their privacy. 

Risks of an incorrect claim

In a time when finances are tight, businesses will want to make sure they claim for all the staff costs that are relevant to their R&D project: however, there are three key risks to getting a claim for staffing costs wrong.

The simplest risk is that the incorrect claim is challenged by HMRC, delaying repayment and triggering more work in the long run. Then there is the reputational risk of making a claim that HMRC may regard as careless: subsequent claims are likely to face even more scrutiny from HMRC and this may extend to other areas of the business’s tax affairs. But by far the biggest risk if you have furloughed staff, is that an incorrect R&D claim also triggers an investigation into your furlough claims under CJRS: HMRC can launch a CJRS enquiry up to four years later (or twenty years later in the case of suspected fraud). If you have concerns about the accuracy of your furlough claims, read more on our CJRS process risk review tool.

As with much of tax legislation, each situation should be evaluated according to its particular facts and circumstances, so if you would like to discuss a particular R&D project claim or scenario please reach out to Carrie Rutland or one of the BDO R&D team.