A lot of people don't realise this but grant funding and R&D Tax Credits aren't mutually exclusive. In fact, the idea of both cropping up in your books in the same tax year is enough to send many accountants scurrying for cover. The truth, and the good news, is that a company currently getting a grant can claim R&D Tax Credits as well.
But hold on! Let's not get carried away too quickly. Grant funding and R&D Tax Credits don't always work smoothly together. If you’ve already had part, or all, of your R&D project funded and are also hoping to claim R&D Tax Credits, there are some key things to consider.
How Grants and R&D Tax Credits work
If you’ve received a grant but also qualify for a Research and Development Tax Credit claim, you need to think about what type of grant you’ve received. If the grant is notified State Aid, then putting even a penny of it toward funding your project would knock you out of the running for the SME scheme. That's the most generous of the R&D schemes, netting you to a further 130% of your qualifying costs against your profit. In real terms, that can mean up to 33% of those costs back as a tax credit.
As for why State Aid disqualifies your project from the SME tax relief scheme, it's because it’s really just another form of State Aid. Grabbing two helpings is considered unsporting in most situations, and this is no exception.
You'll usually be able to tell if your grant is State Aid or not from its documentation. It should state it pretty clearly in the terms of the grant. However, State Aid comes in lots of different flavours, so double-check with the awarding body if you're not sure where you stand.
However, just because you can’t claim your project under the SME scheme doesn’t mean you can’t claim at all. The Research and Development Expenditure Credit scheme (RDEC) is designed for larger companies and doesn’t count as State Aid. However, it's a lot less generous and the eligible costs are stricter.
Other non-state aid grants and subsidies (this includes "de minimis" aid) also affect your R&D claim, albeit less drastically. Basically, any areas of the project you’ve funded yourself can still go through the SME scheme. Meanwhile, all your subsidised expenditure can be put through the RDEC scheme. Striking the right balance depends on your eligible expenditure and the size of the grant. For example, spending £100,000.00 on an R&D project means there’s no way you’d turn down State Aid of £75,000.00. Clawing back the best part of the development costs up-front will far outweigh any retrospective R&D claim you could make. However, you might be singing a different tune when it comes to smaller grants.
Here are a few examples to show what we mean:
Companies A, B and C each have three qualifying R&D projects. Each project has £40,000 of eligible expenditure, bringing each company’s total eligible expenditure to £120,000. All companies are making heavy losses, which positions them to receive the highest R&D Benefit (33p of every £1 spent).
Company A hasn’t received notified State Aid or grant funding of any kind and claims R&D Tax Credits under the SME scheme as normal. It receives a tax benefit of £39,600.00.
Company B receives a one-off notified State Aid payment of £15,000. They split this equally between the 3 projects. This relegates them to claiming under the RDEC scheme, which at 8.8p on every £1 spent results in a tax benefit of just £10,560. With the addition of the £15,000 grant, this gets them £25,560.
Company C also receives £15,000 in State Aid, but they funnel it into a single project. This leaves them to claim under the SME scheme for 2 of their projects, while the remainder is claimed through RDEC. This smart move bags Company C £29,920 in R&D tax benefit on top of the grant funding, giving them a total of £44,920.
Company A – R&D Scheme only R&D qualifying spend - £120,000 R&D benefit after one year - SME: £39,600 Total benefit - £39,600
Company B – RDEC Scheme only R&D qualifying spend - £120,000 State Aid received - £15,000 split over the 3 projects at £5,000 per project R&D benefit after one year - £10,560 Total benefit received including the grant - £25,560
Company C – RDEC and SME scheme R&D qualifying spend - £120,000 State Aid received - £15,000 spent on one project only R&D benefit after one year - RDEC: £3,520 R&D benefit after one year - SME: £26,400 Total benefit including grant - £44,920
This is just one way for a company to get grant funding and R&D Tax Credits working together. Another common way is to "ring-fence" the grant funding from the qualifying R&D costs. The grant may specify what you can spend the cash on (personnel costs, for instance), but where it’s left open you can channel it into areas of the project that don't qualify for R&D tax relief (marketing, manufacturing or intellectual property costs, for instance). This leaves you to claim the qualifying project costs under the R&D scheme.
Like most areas of tax law, it gets more complicated the deeper down the rabbit hole you go. However, by ensuring you know exactly what grant funding you’re getting and how it ties in with other funding options, you can avoid the pitfalls and max out the benefits. Most importantly, you'll have busted the damaging myth that grant funding and R&D Tax Credits don’t get along.
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