Written by Antonio Narducci and Ben Hewitt

The government’s Coronavirus Job Retention Scheme[1] was launched on 20th March 2020 in response to the global pandemic. Since then it’s estimated that around 11.7 million jobs from 1.3 million different employers were furloughed in the United Kingdom[2]. As you’d expect, this has had a huge impact on the R&D tax credit applications of many businesses across the UK.

Can I include furloughed staffing cost in my R&D tax credit application? 

Although the Coronavirus Job Retention Scheme (CJRS) is not notified State aid, HMRC do not allow the staffing costs for furloughed employees to be included in R&D tax credit applications, even if the company contributed with top-up.

In order for staffing costs to be eligible, employees must be actively working on R&D projects. Because staff members are instructed to cease all work relating to their employment during periods of Furlough, the above criteria isn’t met. As such, the gross salaries, employers NIC and pension contributions received throughout the furlough period are not eligible for recovery under R&D tax credit relief. This includes both the salary met under CJRS and any “top-up” made by the company[3].

Whilst this is likely disappointing news to many UK business owners, there is some good news!

From July 2020, HMRC introduced the possibility of flexible furlough for employees, allowing for individuals to return to work part-time[4]. This has allowed the working hours spent on R&D projects to be included in the R&D application; meaning the relevant portion of an employee’s remuneration (gross salary, bonus, employer’s ) will be eligible for recovery. As above, the costs relating to furloughed time need to be taken out of the calculation.

What happens with holiday pay?

HMRC consider holiday pay as a necessary cost of the individuals employment (like bonuses, employer’s national insurance contributions etc.), and thus holiday pay can be included for employees involved in R&D projects[5]. This allows for the recovery of staffing costs during holiday periods, in line with their R&D involvement. However, the costs associated with holiday used during periods of Furlough will again be considered to be subsidised, preventing recovery under the SME incentive and necessitating the costs to be considered under the RDEC incentive.

Further considerations

In addition to CJRS support, many companies have taken advantage of a number of other funding incentives, including Bounce Back Loans, the Coronavirus Business Interruption Loan Scheme and other grant funding. Whether the funding received is considered notified state aid or simply subsidised expenditure, it can have a significant impact on a company’s R&D recovery, and will therefore need to be carefully considered within an R&D application. In future articles, we will look into these various types of funding in more detail, and the impact they have on your R&D recovery.



[1] Claim for wages through the Coronavirus Job Retention Scheme (gov.uk)

[2] Cumulative number of jobs furloughed under the job retention scheme in the UK (statistia.com)

[3] R&D tax relief and furloughed employees (icaew.com)

[4] R&D tax relief and furloughed employees (icaew.com)

[5] R&D tax relief and furloughed employees (icaew.com)