There are a range of grants available to businesses, together with companies being able to claim R&D tax relief. However, certain grants can impact the amount of R&D tax relief available and it is especially important at the moment to be aware of this, with many companies accessing the various Covid-19 support packages.
The R&D schemes available
There are two R&D tax reliefs available; the Small and Medium Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) Scheme. The SME scheme provides 25 pence of relief for every £1 spent on R&D, or up to 33 pence of tax repayment if the company is loss making. The RDEC scheme is mainly for large companies and is less beneficial as it provides 11 pence of relief per £1 spent.
The SME scheme is classified as notified state aid. This has an impact on a company’s eligibility to claim R&D tax credits as under EC rules companies are not allowed to receive more than one type of notified state aid for each project. Companies therefore need to consider the effect of grants on R&D claims, preferably prior to applying for the grant.
Notified state aid
When identifying the impact of a grant on a company’s R&D claim, the first step is to identify whether the grant is notified state aid. Notified state aid is one which has been notified to, and approved by, the European Commission. Innovate UK grants and the Coronavirus Business Interruption Loan Scheme (CBILS) are both notified state aid.
What impact does a notified state aid grant have on a R&D tax credit claim?
The effect on the R&D claim will depend on whether the grant is for a specific project. If it is for a specific project, relief is not available under the SME scheme and all of the expenditure incurred on the project should be claimed via the RDEC scheme. If the company has carried out additional projects, relief should be available under the SME scheme for those projects.
If a company has some projects eligible under the SME scheme and some via the RDEC scheme, it will be important to ensure there is a clear separation between the costs incurred.
What if the grant is notified state aid, but it is not for a specific project?
If the grant is not for a specific project, then expenditure incurred can be claimed via the SME scheme. This may be applicable for CBILS, as the loan terms may be for ‘general business use’. However, it is important to review how the R&D expenditure has been funded. If there is only grant income in the accounts and no other income, it will be difficult to show to HMRC that the grant has not been used on the R&D project.
If any grant income has been used on the R&D project, relief will only be available under the RDEC scheme.
What about de minimus state aid grants?
Another consideration is whether the grant is classified as de minimus aid.
De minimus aid is a form of state aid and is less than €200,000 over a three year period, which does not have to be reported to the EU. An example of this is the Horizon 2020 scheme. Bounce back loans are also likely to be de minimus.
If the grant is de minimus, any expenditure incurred to the value of the grant, should be claimed via the RDEC scheme. Excess expenditure can be claimed via the SME scheme.
What about grants which are NOT notified state aid?
Any grants received which are not notified state aid, should be treated in the same way as de minimus state aid grants above. So, expenditure up to the value of the grant should be claimed via the RDEC scheme and any excess claimed via the SME scheme.
The next step
If you would like to discuss your R&D tax credit options and how to maximise you claim, whilst benefitting from a tax saving, get in touch with Sasha Talbot at firstname.lastname@example.org or your usual UHY adviser.