Since private funding is set to slow down over the next couple of quarters, Government schemes - such as R&D tax credits and Innovate UK funding grants - are going to be critical in the coming weeks and months.

And as the UK has gone into near total-lock down, there are a number of problems heading down the track.

One such measure is the Coronavirus Business Interruption Loan Scheme, or ‘CBILS’. It provides for up to £5m of funding for smaller businesses who are seeing their revenues wiped out by the pandemic. In addition to facilitating funding, the scheme benefits from lower initial repayments and no upfront fees.

State Aid

CBILS represents ‘State-aid’. State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. CBILS dwarfs the €200,000 de minimis, meaning as a state aid measure it has to be ‘notified’ to the EU Commission with the hope that it will be approved and not declared unlawful.

Research & Development Tax Credit

It is unlikely many businesses were worrying about whether CBILS was state aid, or even lawful state aid. The ****problem, however, is that it is state aid.

And this could very well present a problem for those businesses accessing another facility that can provide badly needed cashflow such as Research & Development Tax Credits.

In simple terms R&D Tax Credits:

• Can generate 25p in the £1 for every £1 of qualifying spend on qualifying projects – i.e. companies executing projects with innovation at their heart.
• For loss making companies this becomes a cash injection of circa 33p.

R&D Tax Credits is itself deemed akin to state aid. One of the conditions for its approval is that any project benefiting from notified state aid funding cannot also qualify for R&D Tax Credits.

Let’s assume we have a business with a December year-end.

• It accesses a £250,000 CBILS loan in its year ended 31 December 2019.
• During the period it has spent £1million on qualifying R&D expenditure.
• The business would have been expecting to qualify for a £250,000 injection via R&D Tax Credits.
• It is highly likely the project would have continued into next year – generating more tax credits.

Now if the CBILS loan funds the project costs, in full or in part, then arguably the project no longer qualifies under R&D Tax Credits SME scheme (the more lucrative scheme).

The project would still attract relief under the Research & Development Enhanced Credit (“RDEC”) Regime, but this is a lot less lucrative at circa 10p in the £1, and with certain heads of expenditure excluded such as sub-contractor costs.