The good news is that grant funding does not prevent you from claiming R&D tax credits outright. It does affect which scheme you can use which, in turn, impacts the value of your claim. The type of grant you secure is also a factor in your subsequent R&D tax credit claim.
It won’t surprise you to learn that there is not one straightforward equation for this financial conundrum. Here we deconstruct the basic rules into simple explanations so that you can make your own assessment of your situation. We follow this up with our tips for optimising your funding and R&D tax credit relationship.
Types of funding
Most businesses, particularly in their infancy, are funded from a number of different sources: grants, loans, equity or share investment, R&D tax credits and grants. It is incredibly important to look at your financial picture with a wide lens to make the most successful decisions for your business. There is a particular issue with the interaction between grants and R&D tax credits that is based on EU marketplace competition rules.
EU rule on state aid
In order to maintain a fair marketplace, EU regulations require companies to give notification of any state aid. This rule is in place to prevent businesses from getting a leg up in the single market from their government.
What does this mean for my R&D claim?
The rules state that you can only make an R&D claim through the RDEC scheme if your project is funded with any kind of ‘notified state aid’ grant, regardless of whether you are an SME or large company.
If you are a large company, you would be using the RDEC scheme anyway and so you are not losing out.
But, if you are an SME, this could mean a serious reduction in the amount you could have claimed through the SME R&D tax credit scheme.
The SME scheme is for companies with up to 500 employees and £86m gross assets or £100m turnover. R&D tax credit relief for profitable SMEs is 26% and 33% for SMEs running at a loss.
The RDEC scheme is for large companies with over 500 employees and more than £100m turnover or £86m gross assets. The rate of R&D relief available for large companies is much lower at nearly 9%.
What is considered ‘notified state aid’?
If your grant meets any one of these criteria, it is considered ‘notified state aid’ within the EU:
- Trade between EU members will be altered
- Its origins are from an EU member state (indirectly or directly)
- Competition could be warped
- Making particular goods or performing a specified action is aided by the grant
‘Notified state aid’ comes with a raft of mandatory reporting paperwork, as well as reducing the value of your R&D tax credit claim.
Are there any grants that don’t come under the ‘notified state aid’ umbrella?
There are currently three types of grant funding that are not notified state aid.
- General Block Exception Regulation (GBER): Unfortunately this doesn’t improve the R&D tax credit claim situation, but it does reduce the documentation required by the EU.
- De minimis: The paperwork has to state ‘de minimis’ explicitly in order for this type of grant to be considered. This type of grant is not under the notified state aid regulation and applies if you are getting up to £200,000 across a three year period. This works well with R&D tax credit rules.
- Centrally distributed EU funding: This includes schemes such as 7th Framework Programme and Horizon 2020. These grants are not notified state aid because they are not considered a threat to the fairness of the single market. They don’t impact on your R&D claim, you just deduct the amount of your subsidy from your SME claim.
Another important distinction for R&D purposes (SMEs)
It is possible to receive both project specific grants and on-project specific grants. In terms of your R&D claim, it is much better to have a project specific grant. That way, only the R&D claim relating to that particular grant funded project is affected by the subsidy rules. The rest of your company’s R&D spending can be processed through the SME scheme as usual. A non-project specific grant means that your entire R&D tax relief claim would have to go through the less valuable RDEC scheme.
In order to get the best value from all the funding sources available to you, particularly if you are an SME, you need to consider all aspects before you start your particular R&D project. It makes sense to think of your R&D claim as something you do at the end of a project, based on the costs you have incurred, and a grant as something that you apply for at the start. But to ensure that you don’t lose out on any money, it is wise to consider both of these elements at the start. A full R&D tax credit claim through the SME scheme could end up being worth more than the grant you are applying for, especially if you are currently making a loss. The impact of grant on this opportunity for future investment is worth serious consideration.
We would also advise seeking expert advice before you make any financial commitments in order to optimise your collective finding streams. Also, as the UK prepares to leave the EU, all financial matters are uncertain. We don’t yet know how this will impact grant funding and the R&D tax credit systems, but you will be the first to know when it all becomes clear.
It’s not worth taking the genuine risk of losing out on thousands of R&D tax relief for the sake of a quick consultation. Give us a call on 0330 0539 112, or email us firstname.lastname@example.org.