Update: Furloughed workers and R&D tax relief

Earlier this month, HMRC published guidance on how the Coronavirus Job Retention Scheme (CJRS) or furloughed workers scheme, would be treated for the purposes of R&D tax relief. The good news for us is that the advice we’ve been giving our clients and had published way back in July was right! This advice is reproduced below, but the key takeaway is that HMRC will not consider furloughed workers to have been directly or actively engaged in R&D during the time they were on furlough, and so this time, and the furlough payments, will have to be excluded from future R&D claims.

As a reminder, the CJRS was launched in March 2020, and forms the cornerstone of the Government’s support to businesses during the Covid-19 crisis. It originally enabled employers to furlough employees and claim back 80% of the salary costs of these workers from the Government. Version two of the scheme came into force in July 2020, and allows previously furloughed employees to return to work part-time, with the Government continuing to fund to portion of time these employees are not in work.

This scheme has been well received and widely utilised, but, based on HMRC’s recently published guidance, how will the furlough scheme affect a claim for R&D tax relief?

The good news is that the furlough payments are not classified as State Aid, so won’t directly affect the ability of a company to claim SME R&D tax relief. Employees who are furloughed are also not allowed to work, so by definition cannot be doing R&D for the time that a claim is made under the CJRS.

However, what the furlough payments will do is make it a lot more complicated to calculate staff apportionments for R&D tax relief claims. To illustrate this, we’ll work through the case of Bob, a laboratory technician. He works in the R&D team at company A, and spends 80% of his time on eligible activities. He was furloughed from 1^st March 2020 to 30^th June 2020, and has now been asked to return to work two days a week from 1st July 2020 to 30^th September. From this point he expects to return to full time work.

So, how would we work out Bob’s overall R&D apportionment for the financial year Jan-Dec 2020? Let’s look at how he will have spent his time:

• Five months full-time work
• Four months completely furloughed
• Three months working 40% and furloughed 60%

Overall, Bob will spend 6.2 months, or 52% of the year at work. Of this time, 80% is eligible R&D, so his overall apportionment would be 42%. Phew!

This kind of calculation is going to be needed for thousands of workers across thousands of R&D claims over the next year or so, so we’d recommend preparing yourself and your clients now! It’s also important to realise that any company that furloughed their R&D staff, or reduced their spend on R&D as a response to the crisis will see a proportional reduction in the size of their R&D tax relief benefit, so expectation management will be key to happy clients and accurate claims.