Fundamentally the question of whether a grant will affect your R&D tax credit claim will depend on two factors:
- Whether the grant is classified as notified state aid or non-state aid.
- And where a notified state aid grant has been received, whether it is project specific or non-project specific.
Timing of grants and R&D tax credits
Grants are a form of upfront funding and are awarded via competitions through Innovate UK – the UK’s innovation funding body. Businesses will have to make a successful pitch to receive a grant from Innovate UK. Conversely, R&D tax credits are a retrospective tax incentive i.e. a business would make the claim after the accounting period in which the R&D took place.
What is notified state aid?
If your company is in receipt of notified State aid for an R&D project it cannot claim any other State aids for that same project.
Notified State Aid is State aid which has been notified to and approved by the European Commission. It includes:
- Government-funded grants e.g. Innovate UK grants
- SME R&D tax relief
It is important to note that not all government grants are classified as notified state aid, and in specific circumstances, a grant which would normally be considered state aid, will not be. When in doubt, your grant provider should be able to clarify whether your grant is notified state aid.
If your company is in receipt of notified State aid for a specific R&D project it cannot claim any other State aids for that project. I.e. only one form of State aid is permissible per R&D project. This means even if a proportion of the project is self-funded, SME tax credits cannot be claimed as the SME scheme itself is classified as a notified state aid.
However, the RDEC scheme is not classified as notified state aid, so companies can also claim under the RDEC scheme for qualifying R&D costs funded by a grant. Although the RDEC scheme is less lucrative, returning around 11% of the R&D costs, versus up to 33% with the SME scheme.
Grant funding and de minimis aid
Government grants relating to innovation are awarded by Innovate UK through innovation competitions. The size of the grant awarded can range from £25,000 – £10 million.
Where a company has received less than €200,000 over 3 years, this aid may qualify as De Minimis aid under the De Minimis Regulation. No notification or approval from the commission is required here as this will not be seen to affect market competition.
- A company cannot claim SME R&D Tax credits for the proportion of the R&D project which is funded by the De Minimis aid.
- It can, however, claim SME tax credits for the portion of the project which is not funded by de minimis state aid.
Non state aid - EU funded programmes
The EU provides innovation and research grants that are not classified as notified State aid as they are not channelled through the UK Government, these include:
- ‘Horizon 2020’
- Framework Programme
N.B. European funds which are controlled by the UK government such as the ERDF (European Regional Development Fund) are classified as state aid.
Therefore, SMEs in receipt of non-state aid grants (e.g. direct EU funding) can claim relief under the SME R&D tax credits scheme for any privately funded part of their R&D.
As with state aid grants, RDEC can be claimed for the grant-funded proportion of their R&D.
Project specific and non-project specific grants
We have already discussed in the above section how if a company is in receipt of notified State aid for a specific R&D project it cannot claim any other State aids, for that same project (SME tax credits are classified as state aid). Where this is the case, an SME may only claim under RDEC for the R&D project which has received the project specific grant (grant funding and self-funded expenditure), but may claim SME tax credits for any other R&D project they have undertaken in the claim period.
Non-Project specific grants
In the scenario where the grant received is non-specific, though this is advantageous in terms of flexibility, this will hinder the ability of the SME to claim under the SME scheme for the whole claim period across all of its R&D projects. In this case, a company is eligible to make a claim under the RDEC scheme for all grant funded and non-grant funded projects.
To summarise there are 3 key scenarios we must take into consideration:
1. Company receiving a non-project specific grant.
Though this may seem like a favourable option in terms of flexibility, for R&D tax credit purposes it is the least favourable option. This type of grant requires the company to claim under the RDEC scheme (currently 13% tax credit) across all its R&D projects.
2. Company receiving a project specific grant.
This is a more favourable option than the first scenario. A company receiving a project specific grant will only be confined to claiming the RDEC tax credit for the project the grant was received for, this includes the grant funded portion and the self-funded portion. The company can go on to claim under the more favourable SME scheme for any other non-grant funded R&D projects they have undertaken in that claim period.
3. Company receiving a non-state aid grant (e.g. direct EU funding).
This is the most favourable option for a company, as the non state-aid grant does not affect how the company can claim R&D tax credits for any of the self-funded R&D it undertakes. In this scenario RDEC can be claimed for the grant portion of the R&D project it has been allocated to, and SME tax credits can be claimed for the self-funded portion of the R&D project the grant has been allocated to. As with project specific grants, SME credits can also be claimed for any other R&D projects the company has undertaken in the claim period.