Impact of the Coronavirus Job Retention Scheme on R&D claims

David Ward

David Ward

Tax Partner & Head of Specialist Taxes

Companies will soon need to consider the impact of furloughed staff on their future R&D claims.  This will form part of the work that we undertake in preparing our clients’ claims, but as a high-level summary, there are two key aspects to consider: Are the staff costs eligible for relief at all? For SME scheme claimants, are those costs subsidised?

The staffing cost rules

Under the Coronavirus Job Retention Scheme (CJRS), one of the key conditions for an employee to be furloughed is that they have been instructed by their employer to cease all work in relation to their employment. From 1 July 2020 it has been possible to be a flexibly-furloughed employee, which allows businesses to bring back employees part-time, but requires the employee to do no work in relation to their employment during a CJRS claim period. Furloughed staff are permitted to undertake study and training.

As the furloughed employees have ceased all work during the CJRS claim period, HMRC considers that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means that, during those times, the eligibility conditions are not met in respect of the costs of those individual staff members. HMRC therefore expects to see these costs excluded from SME (small and medium-sized enterprises) and RDEC (research and development expenditure credit) claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.

In respect of furlough payments made to staff where none of those payments have been met by the Government through the CJRS scheme; as with payments within the CJRS scheme, where furloughed employees have ceased all work, HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development. If some qualifying activity has been carried out then HMRC would expect companies to claim R&D relief in the usual way and appropriate apportionment methodologies would need to be considered.

The subsidy rules - only applicable to SME R&D claims

The CJRS is not a notified State aid, so when furlough payments are met by the Government through the CJRS, the specific notified State Aid rules within the R&D legislation are not in point. 

However, to the extent that furlough payments are met by the Government through the CJRS, the general subsidy rules do apply, meaning that the expenditure has to be treated as having been subsidised and to that extent, will not qualify for relief in the SME scheme. 

In practice, the question will be whether amounts were received under the CJRS in respect of R&D activities undertaken by staff.  When the CJRS was originally introduced, it prohibited staff from performing any work during the time in which they were on furlough and so it should be clear that furlough payments met by the Government were not in respect of any R&D activities undertaken by staff.

The CJRS was amended with effect from 1 July 2020 to allow for flexible furlough, which could result in the need to apportion CJRS support against otherwise qualifying staff costs. The main area where this is likely to be the case is if annual leave or sick leave is taken during furlough. 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. This means that HMRC allows claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time. HMRC consider 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.

However, the staffing costs incurred on leave and sickness during furlough are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies which only claim RDEC, it will prevent this element of the staffing cost from qualifying for relief under the SME scheme. The company would however be able to include these staffing costs in a claim for RDEC. HMRC will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

Get in touch

This is a complex area which requires specialist advice. If you have any queries or would like more information on R&D claims involving furloughed employees, get in touch with me at or another member of our Innovation Taxes team.