Grants and R&D Tax Credits: Can I Claim Both?
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Grants and R&D Tax Credits: Can I Claim Both?

Companies can receive grant funding and R&D Tax Credits for the same development work. Here’s how. 

Some companies think they can’t receive grants and R&D Tax Credits for the same work. Thankfully, this isn’t true. 

Though there are various kinds of grants available, none of them will prevent your company from claiming R&D Tax Credits too. 

In fact, if you do win a grant, there is a high probability that at least some of your development work will qualify for R&D Tax Credits. 

And maybe other schemes like Patent Box as well. 

But winning a grant does impact 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.

How grants and R&D Tax Credits interact

Broadly speaking, there are four ways in which your R&D tax credit claim might be affected by a grant:

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

Each scenario has a slightly different impact on your R&D Tax Credits claim.

One of the central issues is whether a grant is classed as ‘notified state aid’. Notified state aid is government funding that is regulated by the European Commission, in line with state aid rules.

These rules limit how much financial aid each country gives domestic businesses in order to maintain a level playing field across the continent.

SME and RDEC

SME R&D Tax Relief – one of two schemes that make up R&D Tax Relief – is also classed as notified state aid. 

The other scheme, the Research and Development Expenditure Credit – or RDEC – is not. 

Under EC rules, companies are not allowed to receive more than one type of notified state aid for the same development work. 

So, you cannot claim SME R&D Tax Relief on projects which were wholly or partly funded by a notified state aid grant. From Innovate UK, for example. 

The good news is that you can still claim R&D Tax Relief through RDEC for work that’s been fully or partially funded by a notified state aid grant. 

The ‘bad’ news is that RDEC only provides 10.53% relief on eligible expenditure, compared to a maximum of 33.35% from the SME scheme. 

This means that, in order to maximise your R&D Tax Credit claim, and your overall windfall, you need to identify all of your expenditure that’s eligible for the SME scheme. 

To do this, you need to know precisely which type of grant you’re applying for, or have already received, and how it impacts your eligibility for the two schemes. 

Because things are a little more nuanced than notified state aid vs non-notified state aid. 

Of course, this point is moot if you have to claim under the RDEC scheme anyway.

The four scenarios

But let’s assume that, grants aside, your company qualifies for SME R&D Tax Relief. 

We can look at how each of the four types of grant impacts your eligibility for the SME scheme, and how much government support you can claim overall.

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).  

The upside to non-project-specific funding is that you can usually use this money however you want to. But it’s a good idea to check the T&Cs to see if there are any restrictions. 

The drawback is that any R&D projects you spend this funding on will not be eligible for SME relief. You will have to claim for them under 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 via RDEC.

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

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%. 

Note: 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 mainly on the financial situation of your company.

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

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. 

Non-state aid grants are provided by the European Union, through the Horizon 2020 programme for example, or by private companies, neither of which count as states.

Example

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

So, you would receive £126,638 of relief on £585,000 of investment – an aggregate relief rate of 21.6%.

Coronavirus aid and R&D Tax Credits

The government has launched a range of emergency funding schemes, such as the CBILS and Bounce Back Loans, to help businesses survive the Coronavirus pandemic.

Following some uncertainty, funds from these initiatives have been classified as notified state aid. 

Capital from the CLBILS and CBILS will most likely count as non-project-specific state aid, while Bounce Back Loans have received de minimis status. 

Since the confirmation, we have been advising our clients to keep money from these initiatives separate from their investment capital. This will prevent Coronavirus relief from contaminating your eligibility for the SME scheme. 

For more information on how the Coronavirus is impacting R&D Tax Credits, check out our in-depth article.

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.

Get in touch

If you want to discuss your grant and R&D Tax Credit options, and how to maximise your claim while saving money, then please get in touch.

Our team would be happy to help!

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