Multinational Businesses: Will Your COVID Relief Funds Impact Your R&D Incentive Claims?|
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At a glance:
- Can you benefit from both? Many businesses in the U.S. and the U.K. wonder whether they’re eligible to reap the benefits of the R&D tax credit and various government-backed COVID-19 relief programs.
- Play your cards right: Though most businesses can accept funding from both sources, there is a variety of caveats and potential traps to watch out for.
Partner with professionals: To maximize your tax and funding opportunities, and avoid headaches and missteps, partner with tax professionals, like Aprio, who are well-versed in both the R&D credit and COVID-19 relief programs and can help you make the right decisions for your business.
The full story:
Since the COVID-19 pandemic first swept the globe in March of last year, many businesses in the United States and the United Kingdom have been eager to apply for relief measures introduced by both governments. However, important questions have been risen about the impact of government-backed COVID-19 relief programs on business owners’ ability to reap other tax incentives, such as the valuable research & development (R&D) tax credit.
Below, we help clarify some of the confusion surrounding the topic and ultimately provide tips that U.S.- and U.K.-based businesses can use to maximize both opportunities to improve their balance sheets.
COVID relief and the R&D credit in the U.S.
In the U.S., Congress signed the Consolidated Appropriations Act (the Act) into law in December 2020, which clarified key questions around the R&D credit and COVID-19 relief programs. To start, a business’s Paycheck Protection Program (PPP) loan status does not prevent it from claiming the R&D credit. Before the passage of the Act, the IRS mandated that business expenses paid by PPP loans that were later forgiven would not be deductible; this would also prohibit businesses from using various payroll expenses to calculate R&D expenses. However, now that the IRS has changed its position on this matter under the terms of the Act, businesses can calculate their R&D expenses without any restrictions, even if they obtained a PPP loan.
The same flexibility does not extend to the Employee Retention Credit (ERC), at least for the 2021 ERC claims. To recap, the ERC is a refundable federal tax credit to reward businesses for retaining employees through the pandemic. Under the Act, businesses cannot get a “double tax benefit” from both the R&D credit and the ERC in 2021; although businesses can claim both credits if they’re eligible, they can’t use the same wages to calculate their credit amounts. For the 2020 ERC claims, businesses can use the same wages to calculate both credit amounts. It’s important to enlist the guidance of a qualified, professional tax team that is well-versed in both the ERC and R&D credit to navigate these rules and maximize your benefits.
COVID relief and the R&D credit in the U.K.
There is a range of government-backed loans available to help U.K. businesses navigate the financial impact of the pandemic: the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Large Business Interruption Loan Scheme (LBILS). In general, businesses can obtain both the R&D tax credit and loan payments from these schemes, but like the U.S.-based programs, there are some key points to keep in mind.
In the U.K., the R&D tax credit is comprised of two different categories, or “schemes”: the SME scheme and the large company scheme (also known as RDEC). The SME scheme is classified as Notified State Aid, as are the COVID-19 relief programs. In basic terms, Notified State Aid is essentially leverage given by public authorities through state-backed resources to organizations that could “distort competition and trade in the European Union,” as described by the U.K. government.
An R&D project can’t be eligible for the SME credit if it has received a different form of Notified State Aid; the same rule does not necessarily apply to the large company scheme if it is a subsidized expenditure. Though the former complication is not necessarily common for many businesses, it is essential to consult with a tax team that is knowledgeable of the R&D tax credit and the U.K.’s COVID-19 relief programs to ensure there is no negative interaction between the two that would result in tax headaches for your business.
The other potential trap to watch for is related to the Coronavirus Job Retention Scheme (CJRS), which allows businesses to “furlough” their employees and, in turn, the U.K. government pays up to 80% of those employees’ salaries. Under the HMRC, furloughed employees cannot take on any work from their employer during this period, which precludes them from conducting any R&D-related activities — therefore, preventing the company from claiming the credit.
One final note: Innovate U.K.
Since 2004, Innovate U.K., a grant program sponsored by the U.K. government, has provided funding to businesses that spearhead innovative projects to enrich the U.K.’s economy. When the COVID-19 pandemic gained steam, Innovate U.K. doubled down its efforts, providing £750 million of funding to small- and medium-sized enterprises engaged in research and development.
The good news? Businesses that benefit from Innovate U.K. grants are also eligible to receive the R&D tax credit, which opens the door to generous funding opportunities with which they can continue to foster innovation and grow their businesses. Be sure to work with your tax team to account for any potential conflicts that could arise and ensure that you’re making the right decisions for your tax situation.
- Aprio: R&D Tax Credits and Incentives
- Aprio: PPP Loan Assistance for Borrowers
- Moore Kingston Smith: Research and Development
The bottom line
Where both the R&D credit and COVID-19 relief programs are concerned, it’s critical that you work with an experienced team of professionals to ensure that you’re putting your business in the best possible position, from a tax perspective.
At Aprio, we are proud to have robust International, R&D and CARES Act-focused practices that specialize in helping businesses navigate the complexities of these matters. Together with Moore Kingston Smith, we can help you plan for and make the decisions that work best for the long-term goals of your business. Contact us today to learn more.