The impact of grants on R&D tax relief claims under the SME scheme
It is possible to use both grant funding and R&D tax relief to support innovation. However, taking the time to consider the overall financial benefits of both types of funding before applying for and committing to a grant can help you to identify and navigate to the best possible outcome – seeking out a grant that is not classified as notified state aid.
Recap of R&D schemes
There are two schemes under which an entity may be eligible to claim R&D tax relief: one for SMEs only and RDEC (R&D Expenditure Credit) for large companies and for SMEs not eligible to claim under the SME scheme.
The cash and/or tax benefits available are much more substantial under the SME scheme – up to 33p for every £1 spent on qualifying R&D costs.
Under RDEC, the cash and/or tax benefits available are currently around 11p for every £1 spent on qualifying R&D costs.
So, what’s the issue here?
The issue stems from EU rules around State Aid and competition.
The SME scheme for R&D tax relief is in itself considered to be notifiable State Aid. This is due to the substantial rate of cash and/or tax benefits available.
The ability to claim under the SME R&D tax relief scheme for a qualifying project will be restricted where a company has also received grant funding towards that project. Depending on the type of grant, the SME scheme may still be available for some of the project costs.
All is not lost, however, as should the ability to claim under the SME scheme for grant funded projects be restricted, it is still possible to consider the application of the RDEC scheme and make an R&D claim accordingly. But with the rate of relief considerably lower, this could potentially result in the loss of several thousands of pounds of cash funding from R&D tax relief claims.
An awareness and considered approach to sourcing grants can therefore help to minimise the impact of grant funding on a company’s R&D claims and achieve the best possible value of funding across both of these sources.
The worst-case scenario
A non-project specific state aid grant (i.e., the grant is not identified as being for the purpose of a specific project or specific projects). This would mean that all R&D carried out by a company can only be claimed under the RDEC scheme, which as was outlined above, provides significantly lower rates of relief.
A lesser restriction
A project specific state aid grant (the grant is allocated to one specific identifiable project). This is a better scenario as whilst the R&D costs for the project covered by the state aid grant are claimable under RDEC, any further qualifying projects not being partially funded by grant income will be eligible under the more favourable SME scheme.
The most favourable position
De minimus and other non-state aid funding. In these scenarios, only the value of qualifying costs covered by the grant need to be claimed under the RDEC scheme, with the remaining value eligible to be claimed under the SME scheme.
Regardless of the point at which your business starts to consider applying for grant funding, take a more strategic approach, considering:
- The type of grant by reference to the categories set out above – trying to ensure where possible that the grant falls into the most favourable category to mitigate the impact on the R&D claim.
- The total funding available under that grant.
- The funding derived from R&D tax relief with and without the grant.
Think you have an R&D claim?
Understanding the nuances of tax legislation when it comes to R&D tax relief can be hard. If you hit a road bump in preparations, get in touch.
If you’d like to discuss a potential R&D project, book a call to explore your eligibility and start your tax claim journey.
You can understand more around the reason why many businesses value an exploratory call here.
Time to reflect
If you're not sure what to do next, want time to reflect and time to get to know me as an R&D adviser, you can subscribe to my newsletter to received insights and deepen your understanding of this valuable tax relief.
It's none invasive and you can unsubscribe at anytime.
You can subscribe to my newsletter here.