We’ve written before about how grants can affect a claim for R&D, but even knowing this, it can still be tricky to work out whether it’s better to take a grant or rely on R&D tax relief to help fund R&D. It’s a tricky decision to make, but considering the following points should make it easier!
Grants are usually paid out in arrears, often on a quarterly basis. From a cashflow point of view, this means that a grant holder will see the benefit far closer to when the money is spent than with R&D tax relief. Depending on how quickly a company can pull together their accounts, R&D tax claim, tax comps and CT600 form, it can be over a year between spending money on R&D and seeing any tax benefit.
Another point to remember is that grants are often paid out in cold, hard cash, whereas R&D tax relief is often realised as a reduction in tax payable. Where this is usually of huge benefit to the company in the long term, it doesn’t offer the immediate positive effect on cashflow of a grant.
A claim for R&D tax relief has no mandatory reporting requirements. All a claimant needs to produce is a technical justification and a calculation of eligible expenditure once a year, and they’re done!
On the other hand, grant reporting can be time-consuming, lengthy and repetitive. Grant holders are usually required to submit details of expenses, milestones and project outcomes regularly during the lifetime of the grant, and even beyond this.
Where’s the tipping point?
Overall though, it’s usually best to both claim R&D tax relief and as many grants as possible to maximise R&D funding. However, it is important to know where the tipping point is, when taking the grant it will mean that the company is worse off overall. It’s a fairly complex calculation, but really only requires knowledge of the type and size of the grant and the expected spend on R&D.
Here’s a quick chart to show how grants affect the benefit received by a profitable company with an eligible R&D spend of £150,000. As an SME, this company would receive approximately £37,000 in R&D tax relief if they didn’t receive any grant funding.
First thing to note is that a company should always take a ‘de minimis’ grant if possible – a company receiving this type of grant and claiming R&D tax credits will always be better off. That’s because it’s only the amount of the grant that has to be claimed through RDEC, and all of the rest of the cost can be claimed through the SME scheme.
Second thing to note is that it’s a little more complicated when it comes to state aid grants. These grants push the whole project cost into the RDEC scheme for R&D tax, so taking a small grant can mean being worse off overall. For our example company, a grant of less than about £22,000 would actually cost them money, as they’d get a better return from just claiming R&D tax relief.
So, what does this all mean to an advisor? Well, the key thing is to make sure that you know what grants your client is thinking of applying for so that you can advise them on how this will affect their cashflow and overall benefits. The good news is WhisperClaims is set up to deal with all types of grants and make sure that the correct amounts of expenditure are routed through the SME and RDEC schemes, meaning that you can rest assured that your client’s claims are robust and defensible.