Companies can receive grant funding and R&D Tax Credits for the same development work. Here’s how.
Contrary to popular belief, receiving grant funding does not prevent a company from claiming R&D Tax Relief as well. In fact, none of the various grants available will prevent your company from claiming R&D Tax Relief altogether.
Moreover, if you win an innovation grant, its likely that at least some of your development work will qualify for R&D Tax Relief.
This is because projects funded by innovation grants generally meet the R&D Tax Relief’s schemes criteria for qualifying development work and expenditure.
However, winning a grant will affect your R&D Tax Credits claim. Specifically, how you apportion your application between the two R&D Tax Relief schemes and how much relief you receive.
In this blog, we’re going to explain how each kind of grant would impact your R&D Tax Credit claim. And what you should do to make the most out of both sources of funding.
Grants, R&D Tax Relief and State Aid Rules
R&D Tax Relief and many types of grants are funded by the government. This makes them ‘state aid’.
State aid is closely regulated to ensure governments don’t give domestic companies an unfair advantage.
Currently, the UK abides by state aid rules set by the European Commission (EC). This is likely to change now that the UK has left the European Union, but it’s not clear when this will happen.
State aid that is regulated by the EC is called ‘notified state aid’.
Under EC rules, companies cannot receive two kinds of notified state aid for the same project.
The Research and Development expenditure credit (RDEC) is not notified state aid. The more generous SME R&D Tax Relief scheme, along with various grant funding competitions, is notified state aid.
This means that you cannot claim SME R&D Tax Relief for costs associated with a project that was partially or wholly funded by a notified state aid grant. However, you can file for this project under the RDEC scheme. Assuming you’re eligible, of course.
RDEC is generally less generous than SME R&D Tax Relief, allowing companies to recoup up to 16.2% of their expenditure instead of the SME scheme’s maximum allowance of 33.35%. Though the gap is closing thanks to recent changes the government has made to the two schemes’ relief rates.
So, the key to maximising your R&D Tax Relief claim, and your overall government windfall, is to make all of your projects are filed under the correct scheme.
If you’ve received a grant and are unsure how to do this, GrantTree’s R&D Tax experts are here to help. They have considerable experience working with enabling our innovation grants clients to maximise their tax relief claims.
How grants and R&D Tax Credits interact
Now that we have a basic understanding of state aid rules, let’s look at the four different scenarios in which grants and R&D Tax Relief interact:
1. Notified state aid: Non-project-specific grant
2. Notified state aid: Project-specific grant
3. De Minimis state aid grant
4. Non-state-aid grant
Below, I’ll explain each of these scenarios in detail.
Scenario 1: Notified state aid: Non-project-specific grant
Non-project-specific notified state aid grants are a form of notified state aid, meaning they are not compatible with the SME scheme.
Unlike most grants, non-project-specific funding is awarded to your company as a whole, not a specific project.
A good example of this would be a loan from the Coronavirus Business Interruption Loan scheme (CBILS).
One of the main advantages of non-project-specific funding is that it can be used flexibly to support a company’s general needs, such as payroll, rent, or working capital. But it’s a good idea to check the T&Cs to see if there are any restrictions.
A major disadvantage is that any R&D projects financed using this funding will not be eligible for SME relief, and the company must claim for them under the RDEC scheme instead.
Also, because the funding isn’t tied to specific projects, you have to make sure the money is ring-fenced from your other capital. If you don’t, it may be hard to show HMRC which money was invested where. If that’s the case, you might have to claim for all of your development work under RDEC.
A good way to ring-fence money is to place it in a separate bank account and keep a comprehensive record of where it’s spent.
Scenario 2: Notified state aid: Project-specific grant
Project-specific grants provide funding for a pre-agreed project. This is the project you put forward in your grant application, and that’s listed in your grant agreement. Most innovation grant funding is project-specific.
To explain how this works, let’s say you won a grant for ‘Project A’.
Any tax-credit-eligible money you invest in Project A, including the grant funding and your own capital, must be claimed for under the RDEC scheme.
But any capital you invest in eligible projects that have not received grant funding – Project B, C and so on – can be claimed for under the SME scheme.
So, for Project B and beyond you’ll receive up to 33.35% of your eligible expenditure money back, rather than 10.53%.
Example of project-specific grants and R&D Tax Relief
Let’s say you won a £1,000,000 grant and invested it, along with £1,000,000 of your own capital, into Project A. Now let’s say you invested a further £1,500,000 in two other tax-credit eligible projects.
Your relief would look like this:
| Project | Capital Invested | Grant Invested | SME Relief | RDEC Relief | Tax Credit |
|---|---|---|---|---|---|
|
A |
£1,000,000 |
£1,000,000 |
- |
10.53% |
£210,600 |
|
B |
£1,000,000 |
£0 |
33.35% |
- |
£333,500 |
|
C |
£500,000 |
£0 |
£33.35% |
- |
£166,750 |
|
Total |
£2,500,000 |
£1,000,000 |
- |
- |
£710,850 |
So, you would receive £710,850 of relief on £3,500,000 of investment – an aggregate relief rate of just over 20%.
33.35% is the maximum amount of relief you can claim through the SME scheme. What proportion of your expenses you can claim back depends on several factors including your financial position and when your expenditure took place. More on how much you can claim through the R&D Tax Relief scheme here.
Helpfully, R&D Tax Credit claims are made up of a number of projects. This makes it easier to separate work that’s eligible for the SME scheme and from work that must be claimed under RDEC.
However, things can become complicated when one project directly follows on from another. Where one piece of R&D starts and another ends is often ambiguous, but you need to show a clear separation if you’re going to claim for one of the projects under a different scheme.
If you have two or more contiguous projects, and are worried about separating them in the eyes of HMRC, the best thing to do is speak to a specialist.
Scenario 3: De minimis state aid grant
The third scenario you could face is a state aid grant classified as ‘De minimis aid’.
De minimis aid is a form of state aid which is capped, and therefore doesn’t have to be reported to the European Commission. This means that de minimis grants do not count as notified state aid.
The cap is set at €200,000 over three consecutive fiscal years. If you’re at or close to this cap, an awarding body will not accept your application for additional de minimis funding.
You will have to claim de minimis aid funding you invested in qualifying R&D projects through the RDEC scheme. But you can claim all of your tax credit-eligible investment under the SME scheme, even if you mix your own capital and de minimis funding in the same projects.
Example of de minimis state aid and R&D Tax Relief
Let’s say you invested £45,000 of de minimis aid in Project A, plus a further £50,000 of your own capital. Also, £145,000 of capital in two other projects.
In that case, your claim would look like this:
| Project | Capital Invested | Grant Invested | SME Relief | RDEC Relief | Tax Credit |
|---|---|---|---|---|---|
|
A |
- |
£45,000 |
- |
10.53% |
£4,739 |
|
A |
£50,000 |
- |
33.35% |
- |
£16,675 |
|
B |
£80,000 |
- |
33.35% |
- |
£26,680 |
|
C |
£65,000 |
- |
33.35% |
- |
£21,678 |
|
Total |
£195,000 |
£45,000 |
- |
- |
£69,772 |
So, you would receive £69,772 of relief on £240,000 of investment – an aggregate relief rate of 29%.
Scenario 4: Non-state-aid grants
Non-state-aid grants are treated exactly the same as de minimis aid.
The funding itself must be claimed under RDEC, but all other eligible investment can be claimed under the SME scheme.
Non-state-aid grants do have one major advantage, however: there is no limit to the value of non-state-aid grants you can receive. This is a major advantage compared with de minimis aid, which is subject to a cap of €200,000 over three consecutive fiscal years.
Non-state aid grants are provided by the European Union, through the Horizon 2020 programme for example, or by private companies. Because these grants are not provided by governments or state entities, they do not count as state aid.
Example of non-state-aid grants and R&D Tax Relief
Let’s say you won a £300,000 non-state-aid grant and invested it in Project A, alongside £150,000 of your own capital.
Now let’s say you invested a further £135,000 in two other projects.
Your total relief would be as follows:
| Project | Capital Invested | Grant Invested | SME Relief | RDEC Relief | Tax Credit |
|---|---|---|---|---|---|
|
A |
- |
£300,000 |
- |
10.53% |
£31,590 |
|
A |
£150,000 |
- |
33.35% |
- |
£50,025 |
|
B |
£80,000 |
£0 |
33.35% |
- |
£26,680 |
|
C |
£55,000 |
£0 |
33.35% |
- |
£18,343 |
|
Total |
£285,000 |
£300,000 |
- |
- |
£126,638 |
Maximising your grant and R&D Tax Credits windfall
Those are the main things you need to know about grants and R&D Tax Credits.
There are still plenty of nuances and edge cases to consider, of course. The best way to navigate the two forms of funding, and maximise your windfall, is to speak to an expert.
Our grants consultants can help you win and negotiate a grant contract so that it’s highly compatible with R&D Tax Credits. And our R&D Tax Credits team can make sure you’re claiming every penny possible under the relevant scheme.
