The interaction of grants and R&D tax credits is one of the least well understood parts of HMRC’s R&D Tax Relief scheme, but it doesn’t have to be – it’s actually not that bad once you understand a few basics! In this mini tutorial, we walk you through some of the key tips and rules and show you how these can be applied to your projects (or those of your clients).
The first thing to appreciate is that, from the perspective of R&D tax credits, grants can be split into two types: Notified State Aid, and then everything else (including de minimis State Aid). Notified State Aid is grant funding that has been notified to and approved by the European Commission; in fact, the SME scheme for R&D tax credits is in itself a Notified State Aid! To help prevent Governments over-subsidising their own companies, there is a rule that no project within Europe can be in receipt of more than one form of Notified State Aid. This leads us to Rule 1.
Rule 1 – You can’t use more than one form of Notified State Aid on a project.
This means that if your project has already received State Aid (such as a SMART grant), you can't apply for R&D tax credits under the SME scheme. Technically this applies for the lifespan of the project, so accepting a State Aid grant in one year will preclude claiming SME R&D credits in all subsequent years. However, the news is not all bad! (See Rule 2.)
Rule 2 – You can claim for State Aid-funded projects through RDEC.
More of a tip than a rule, but anyway – RDEC stands for Research & Development Expenditure Credit, which is the scheme available for Large Companies (those with 500+ staff) conducting R&D in the UK.
If you are an SME with a State Aid-funded R&D project, you can normally claim relief under RDEC – which unlike the SME scheme is not a form of Notified State Aid. It doesn’t matter what percentage of the project has been funded by State Aid – all of its expenditure is affected! Here are a couple of examples.
Example 1: £100k project funded by £40k of State Aid.
Example 2: £100k project funded by £10k of State Aid.
In each example above, the whole project must be routed through RDEC, irrespective of how much State Aid it received. So be warned! As an SME, accepting even small amounts of State Aid can have a big impact on your ability to claim for R&D tax relief.
Ok, that’s the evil form of grant funding out the way. Now let’s look at what happens when we fund R&D projects with grants that are not Notified State Aid. Well hello Rule 3…
Rule 3: Non State Aid grants split your project into SME & RDEC components.
Compared with the fire-breathing dragons of State Aid, other forms of funding are much nicer, fluffier creatures. Instead of forcing your whole project into the RDEC scheme, they affect only the amount they subsidise, with the balance allowed to go through the SME scheme as usual. Let’s look at a couple of examples to get a feel for how this works.
Example 3: £100k project funded by £40k of other grants.
Example 4: £100k project funded by £10k of other grants.
In each of these examples, the part of the project subsidised by the grant is routed through RDEC. The remainder goes through the SME scheme as usual. For most companies, this is the best of both worlds – you get your grant, and you also get to claim for a lot of the SME tax credits; nice!
While there is still a bit of complexity we haven’t covered (for example, not all costs eligible under the SME scheme are permissible under RDEC), we hope that gives you a clearer idea of how grants affect claims for R&D tax credits. State Aid is ‘bad’ – but not as bad as people think, as it doesn’t stop you claiming, it just changes how much benefit you get from your claim. Non State Aid is ‘good’, in that it nourishes your projects while not preventing you from claiming for the majority of your oh-so-tasty SME R&D tax credits.
The great news is that all of the above information is baked into WhisperClaims – a robust, cloud-based system that allows you to prepare claims for your clients quickly and with as much expert knowledge as we could pack in (which was a lot).