Government update on Furlough payments and the Coronavirus Job Retention Scheme (CJRS)

The staffing cost rules

Looking first at the payments made to staff where all or a part of those payments have been met by the Government through the Coronavirus Job Retention Scheme (CJRS) scheme. Details about the CJRS scheme can be found here.

Under the 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.

As the furloughed employees have ceased all work during the CJRS claim period HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. HMRC therefore expect to see these costs excluded from R&D and RDEC claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.

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 a result, HMRC will expect to see these costs excluded from R&D and RDEC claims.

Where furlough payments have been made to staff but 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 in the usual way applying a reasonable apportionment.

The subsidy rules (only applies to claims in the SME R&D scheme)

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 rule is not applicable.

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 will therefore not qualify in the SME scheme. The only area where this is likely not to be the case is if annual leave or sick leave is taken during furlough.

Absence from work for sickness or annual leave

HMRC consider that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work. 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 where a company is making a claim in 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.