How R&D tax credits work with grants and other funding sources
In order to understand how different financial aids work together and plan the most optimum path to financing innovation projects, it’s important to have some background knowledge on the types of grants and which of those are compatible. This starts with ‘state aid’.
One possible definition HMRC offers of state aid is a ‘taxpayer-funded resource to provide assistance to one or more organisations in a way that gives an advantage over others.’
In theory, state aid is prohibited because of its potential to distort competition and trade in the EU. Therefore, there are rules in place to balance the support given to organisations, which can be vital for economic growth or policy objectives. While HMRC provide guidance on state aid, the issues and legal aids, it retains strict compliance of the original EU regulations and guidelines.
If the assistance in question meet the criteria of state aid, certain rules will apply and a notification and approval from the EU Commission may be required for the body providing the aid. There are extensive regulations and exemptions in place which will classify the state aid, like De minimis or General Block Exemption Regulations (GBER). Generally, classifications are written into grant documentations and distinguishing between the types of notified and non-notified state aid is important to determine the way you can claim R&D tax credits in conjunction.
How it works with R&D tax credit schemes
EU law prohibits companies receiving more than one state aid for a specific project.
Where the SME R&D tax credit scheme is considered a state aid, RDEC is not due to it’s lower return. Therefore, the way in which R&D tax credits can be claimed will depend entirely on the grant’s purpose and state aid position. The differences arise in whether the state aid you receive is non-project specific, project specific or non-notified state aid.
Non project-specific notified state aid
Non project-specific state aid is generally awarded to companies for all R&D activities, not specific to a certain project they are undertaking. While this allows companies flexibility in budgeting their activities, it does not always result in the best return and therefore may not be the best option. As tax credits are claimed across all qualifying R&D spend, this prohibits the receipt of SME R&D tax credits (also a state aid), leaving the company to claim using the RDEC scheme alone, worth up to an 11% return on eligible R&D spend.
Project-specific notified state aid
When an aid is obtained for a specific project, the rules slightly differ. The company is no longer prohibited to receive more than one state aid as they will not necessarily apply to the same project. Instead, an RDEC claim can be made for the state-funded project and all other projects can be claimed under the SME tax credit scheme, which offers a higher return of up to 33%. An example of a project-specific state aid is a grant from Innovate UK which specifies the funding falls under articles of GBER.
Non-notified state aid
The best case scenario is when you obtain grants or funding that are not classed as a notified state aid. There are a range of aids that fall into this category, such as the De Minimis aid, which limits the aid received to €200,000 across a three-year period, or EU grants like Horizon 2020, replacing the previous FP6 and FP7 grants which some companies may still be receiving. In this scenario, the amount of aid received can be claimed under the RDEC tax credit scheme, and all other qualifying R&D spend can be claimed under the SME scheme, where applicable. This provides your company with the highest returns.
The need for planning
A comprehensive knowledge of state aid regulations and correct application of R&D tax credit scheme in differing scenarios is essential to gaining maximum returns and avoiding the implications and risks of misfiling or overclaiming.
In some situations, obtaining a notified state aid may lead to a lower return where the awarded funding and RDEC relief totals to a lower benefit than receiving no funding and claiming an SME tax relief on the qualifying R&D costs.
Using the same figures in the examples provided, if a company were to receive a £50,000 non-project specific notified state aid with all other qualifying R&D activities totaling at £400,000, than an RDEC claim would be made to give up to an 11% return on £450,000 = £49,500. If the company were to receive no aid at all and make an SME tax claim on their qualifying costs, they could receive up to a 33% return on £400,000 = £132,000. This totals more than the £50,000 notified state aid plus the RDEC benefit of £49,500.
An R&D Tax specialist can advise you on the best options early on and give you a clearer indication of what you can claim back in conjunction to any grants you receive.
Brexit on state aid rules
With less than a month to go for UK's Brexit transition, there is still uncertainty around the possible impacts on the EU Commission's state aid rules. Yet to reach a trade deal, state aid is one of major disagreement points between the UK and EU, with the EU insisting on UK's continued compliance with current state aid rules and the UK unenthused by the limitations of its sovereignty - more in favour of an agreement similar to EU's trade deal with Canada which mirrors obligations under the WTO anti-subsidy agreement.
The government has indicated that in the event a deal is not reached there will be no immediate changes to the system. However with overlapping complications such as the Northern Ireland Protocol, which states Northern Ireland will continue to be subject to EU's state aid rules in relation to goods, and the UK Internal Market Bill, which allows ministers to override the state aid provisions of the protocol, beyond complying with the WTO requirements, the future of state aids is unclear.
Receiving a grant and not sure what kind of R&D tax claim to make? Get in touch with us for more information and advice at firstname.lastname@example.org.