Business Tax

Latest updates:
Update regarding set off of R&D credits against other liabilities
Updated company residence and permanent establishments HMRC guidance

R&D Tax Relief

On 2 April 2020 HMRC provided some clarification on matters relating to the R&D Tax relief. The areas covered in the email update from HMRC are:

R&D Returns & Payments 
HMRC confirms that their priority is to maintain their published aim of clearing 95% of SME tax credit claims within 28 days and that currently they are meeting this aim. HMRC will be sympathetic to those facing difficulties in meeting filing or amendment dates and refer to SP 5/01 which explains how HMRC will decide whether each claim will be accepted.
Set off of R&D claims against other taxes 
Where the business has other liabilities owing to HMRC, HMRC clarifies that in the case of RDEC, HMRC has no discretion under the current legislation, and will be operating on the basis of the existing set off provisions. For claims in respect of the payable SME credit, HMRC are considering the position (see further update below).
Going concern requirement 
HMRC notes that this condition is a statutory requirement so it cannot be overlooked. It is noted that the condition requires the claimant company to have been a going concern according to the last published accounts, which will in many cases have been prepared before the effects of COVID-19. This means that there should not be any issue caused by the going concern requirement. HMRC will continue to monitor the impact of COVID-19 on customers’ ability to meet this and other requirements. 
Government support schemes – state aid? 
The Government has notified the Coronavirus business interruption loan scheme (CBILS) as a State aid under the European Commission’s new Temporary Framework for COVID-19. The measure is a fully notified aid, so the restriction on receipt of other State aid (s1138(1)(a) CTA 2009) potentially applies, if the CBILS relates specifically to the company’s R&D expenditure on a project rather than being intended more generally to support the company. This will depend on the facts. HMRC will be monitoring the application of this rule and would welcome feedback.


Further details in the full text extracted from the email from HMRC can be found here.

Update regarding set off of R&D credits against other liabilities (5 May 2020)
With regard to questions around whether R&D claims will be paid in full even where the business has outstanding tax liabilities, HMRC has confirmed that if a VAT liability has been deferred as a result of the measure announced by the government in light of the COVID-19 pandemic, namely the permitted deferral of VAT for the period of 20 March – 30th June (more guidance can be found here), the VAT deferred will not be constituted as a ‘liability owing’ to HMRC and, therefore, the R&D tax credit or R&D Expenditure Credit (RDEC) will not be set off against these VAT liabilities.
However, this is not the case in respect of other outstanding tax liabilities, including any debt in respect of VAT owing to HMRC and arising outside of the specific period allowed for VAT deferrals mentioned above and any tax which is paid late by companies pursuant to an agreement reached with HMRC under the Time to Pay (TTP) service. Our understanding is that in these circumstances the tax liabilities are still considered to be ‘owing’, despite the taxpayer having reached an agreement as to the timing of payment of these liabilities under the TTP service, and, therefore, the RDEC or R&D tax credit will be offset against these liabilities.  


Company Residence and Permanent Establishments

HMRC has issued some guidance in relation to HMRC’s approach to company residence and permanent establishments in response to COVID-19 Pandemic. The key points in the guidance from HMRC are:

HMRC consider that the existing legislation and guidance in relation to company residence and permanent establishments, already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic
Company Residence 
HMRC does not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time. The existing HMRC guidance makes it clear that HMRC will take a holistic view of the facts and circumstances of each case.
With regard to permanent establishments, we do not consider that a non-resident company will automatically have a taxable presence by way of permanent establishment after a short period of time. Similarly, whilst the habitual conclusion of contracts in the UK would also create a taxable presence in the UK, it is a matter of fact and degree as to whether that habitual condition is met. Furthermore, the existence of a UK PE does not in itself mean that a significant element of the profits of the non-resident company would be taxable in the UK.

The full text of the guidance issued by HMRC on 3 April 2020 can be found here. This guidance is now incorporated in HMRC’s International Manual (new paragraphs INTM261010 and INTM120185). The guidance was updated on 5 May 2020 with the addition of one paragraph at the bottom of INTM261010 and two paragraphs at the bottom of INTM120185.