HMRC have published new guidance on how companies claiming Research and Development (R&D) relief should treat staff costs where workers have been furloughed under the Coronavirus Job Retention Scheme (CJRS).

Claims for staff costs under both the SME R&D scheme and the large business R&D Expenditure Credit (RDEC) scheme must relate to time spent by staff actively engaged in R&D activities. A key condition of the CJRS up to 30 June 2020 was that staff were not to engage in any activity for their employer, including R&D activity, whilst furloughed. HMRC therefore expect staff costs for furloughed periods to be excluded from claims. This means that even where the employer has borne the costs of topping up their furloughed employees’ wages and those employees would normally be engaged in qualifying R&D as part of their general duties, no claims may be made for those top-up costs.

The exception to this is holiday pay and sick pay. HMRC consider that the costs of annual leave and sick leave are part of the overall remuneration of an employee and therefore a part of the cost of their working time, meaning that they can, in part at least, be attributed to qualifying R&D activity.

This means that where sick leave or annual leave is taken during a furlough period the employee pay attributable to that leave can be included in the staffing cost calculation, subject to the rules on subsidised expenditure as set out below.

For example, if during an accounting period an employee’s pay included £3,000 which related to annual leave and time off sick, including the period that they were furloughed, and they spent a third of their time on R&D during that same acounting period, £1,000 of the holiday and sick pay can be included in the R&D claim.

Flexible furloughing was introduced from 1 July 2020 and any R&D related activities performed from that date can be claimed for as normal. The caveat to this that the CJRS is classed as a government subsidy (though not state aid). To the extent furlough payments are met by the Government, the expenditure must be treated as having been subsidised, and will not qualify for relief under the SME scheme. Claims can still be made under the RDEC scheme which has no such restrictions.

The HMRC guidance also states that staff bonuses should only be included where they are linked to R&D activities carried out as part of the employment, whilst redundancy payments for gardening leave or in lieu of notice should typically be excluded from claims as in these circumstances employees cannot be regarded as being directly or actively engaged in relevant R&D. 


R&D: SME Tax Credit scheme
What Research & Development (R&D) schemes can be claimed by R&D? How to make an R&D claim?

R&D: 'Large Company' Scheme (RDEC) Guide
R&D Relief is a Corporation Tax relief. There are two schemes for claiming relief, depending on the size of the company or organisation.

R&D Zone: State Aid and Subsidised expenditure
Grants and State Aid and how they impact R&D Claims. R&D relief is available for subsidised expenditure, subject to EU State Aid rules.

External link

HMRC Manual CIRD 83200


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