Does Grant Funding Affect my R&D Tax Credits Claim?

Does Grant Funding Affect my R&D Tax Credits Claim?

Even if a company has received grant funding, they can still obtain R&D tax credits for the same development work! There are a range of grants out there, but all allow you to apply for R&D tax credits too. It is highly likely that at least some of the development work funded by a grant will be eligible for an R&D Tax Credits claim.

However, the type of grant funding you receive does affect your R&D Tax Credits claim. There are two types of R&D tax relief you can apply to – the SME Scheme and the RDEC Scheme. The latter scheme comes into play not only for large businesses, but also when you have received a grant for R&D tax credits eligible work.

There are four types of grants that impact how you apportion your application between the SME and RDEC (Research and Development Expenditure Credit) Schemes:

  • Notified state aid: Non-project-specific grant
  • Notified state aid: Project-specific grant
  • De Minimis state aid grant
  • Non-state-aid grant

State Aid Rules

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.

In more detail, state aid is seen to give companies an advantage over others that do not receive it. This means that it distorts fair competition which is detrimental to both consumers and other businesses. However, state aid can be necessary and justifiable in instances where there is a genuine gap in the market.

State aid rules have therefore been put in place to avoid this government funding from interfering with competition. In general, multiple forms of state aid should not be granted to fund the same business project because it no longer becomes a justifiable incentive. By restricting how much aid a company can receive, it means an organisation that does receive aid is not overly reliant on just that one form of funding and remains motivated to achieve their project. It also means that funds can be distributed fairly amongst different businesses, where new entrants are encouraged, and weak entrants are less likely to stay in the market.

What type of Grant funding have I received?

When working out whether grant funding is classified as state aid or not, it’s helpful to consider the following questions:

  • Was the aid offered by the UK government or another EU member state?
  • Did the aid affect any aspect of trade between member states of the EU?
  • Did receiving the aid threaten or distort competition?

If the answer is yes to one or more of the above, then the funding you’ve received is classed as state aid. However, all is not lost because not all state aid requires notification to the EU. Therefore, if no notification is required then the company can still use the SME branch of the R&D tax relief scheme.

So, when else might state aid in fact be non-notified state aid? A common example concerns de minimis state aid. Small amounts of funding (amounting to less than €200,000 over three years per recipient) – don’t need to be notified as the EU considers relatively small amounts to have limited effect on competition and trade. For companies that have received de minimis state aid, only the amount received during the accounting period needs to be extracted and enhanced under the RDEC scheme. Any eligible expenditure left remaining after that will come under the SME branch.

The Two Types of R&D Tax Relief: SME and RDEC

Although the SME Scheme is classed as notified state aid, the RDEC Scheme is not. Under EC rules, companies are not allowed to receive more than one type of notified state aid for the same development work.

SME R&D Tax Relief cannot be claimed on projects which were wholly or partly funded by a notified state aid grant, such as a grant awarded by Innovate UK.

However, for grants such as these, you can still apply under the RDEC Scheme! The RDEC Scheme is still worth roughly 11% of eligible expenditure. As the SME Scheme could be worth up to 33%, it is vital to identify all expenditure correctly. This is where TBAT Innovation come in – helping you to properly apportion work to either the SME or RDEC Scheme to maximise your R&D tax relief claim!

Identifying the Four Types of Grants

The four types of grants that determine how your R&D tax relief claim is apportioned

Non-project-specific notified state aid grants

These 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.

Project-specific grants

These 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.

De minimis aid

Small amounts of funding (amounting to less than €200,000 over three years per recipient) don’t need to be notified as the EU considers relatively small amounts to have limited effect on competition and trade. This means that de minimis grants do not count as notified state aid. If you’re at or close to this €200,000 cap, an awarding body will not accept your application for additional de minimis funding.

For companies that have received de minimis state aid, only the amount received during the accounting period needs to be extracted and enhanced under the RDEC scheme. Any eligible expenditure left remaining after that will come under the SME branch.

Non-state-aid grants

These 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.

One major advantage of non-state aid grants is that 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 or by private companies, neither of which count as states.

Maximising your R&D Tax Credits claim

As you can see, there are many ways that grant funding can affect your R&D Tax Credits claim, but it is still worth applying! Even though state aid and HMRC rules may seem complex, an expert advisor will help you navigate all the nuances and edge cases to maximise your claim.

If you’ve already won the grant, TBAT Innovation can examine the type of grant you have received to establish how this impacts on your R&D Tax Credits claim eligibility to the SME and RDEC Schemes and determine how much government support you can claim overall.

If you are thinking of applying for grant funding, our grants consultants can help you win and negotiate a grant contract so that it’s highly compatible with R&D Tax Credits while our R&D Tax Credits team can make sure you’re claiming every penny possible under the relevant scheme.

We’d love to speak to you about helping with R&D Tax Credit claims. Please contact us here.

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