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Furlough’s impact on R&D tax relief

Are staff costs for those on furlough still an allowable expense in R&D tax credit claims?

Furlough’s impact on R&D tax relief
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  • Nigel Holmes
  • November 13, 2020
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Usually, staff costs make up a significant element of the pool of allowable expenses in R&D tax relief claims.

The Coronavirus Job Retention Scheme (CJRS) scheme, therefore, raised a lot of questions about how furlough pay for workers usually engaged in R&D should be treated in tax credit calculations.

During the pandemic, many companies felt that, through no fault of their own, they had to ask staff to cease all work and stay at home, significantly reducing the size of R&D claims for this period.

Businesses using the CJRS got to claim the cost of 80% of staff salaries, up to £2,500 a month, but they could top this up to make up the difference and still needed to pay National Insurance contributions on the total amount as usual.

On the whole, even though the CJRS payments don’t qualify as state aid, they do meet the definition of general subsidies. This means that the furlough pay for these workers must be deducted from claims made under the SME scheme.

During normal employment, staff costs are only eligible for R&D tax relief if the worker has been engaged in a qualifying research and development project. Unfortunately, this also means that any pay relating to a furlough period (whether incurred by the employer or through CJRS) is not eligible because these staff have remained at home, not working. It also then follows that NI and pension fund contributions are not eligible either.

However, if staff were later flexibly furloughed — which means they were brought back part-time — then only those costs associated with periods not on furlough and actively engaged in R&D will qualify. HMRC will expect claims to draw their attention to the standard proportion rules.

The only exception to the above, as set out in HMRC’s Corporate Intangibles Research and Development Manual (found at, relates to sick and holiday pay.

HMRC normally regards these as part of the cost of employment, so they would remain eligible expenses for those on furlough were it not for the fact that the CJRS support constitutes a subsidy.

This rule regarding staff receiving sick and holiday pay doesn’t affect businesses claiming under the R&D expenditure credit (RDEC) scheme for larger firms because of the way the calculations are made but it will prevent smaller firms claiming these costs under the SME scheme. SMEs will only be able to include this element of staffing costs under the RDEC scheme as a subsidised cost.

Nigel Holmes is head of R&D technical operations at Catax



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