Grants and RD tax relief
The interaction of grants and R&D tax credits can be complex, but it's very important to get it right - treating grants incorrectly can lead to vastly over or under-claiming R&D tax relief. However, there are a few simple rules that can help you get it right every time.
The first thing to appreciate is that, from the perspective of R&D tax credits, grants can be split into two types: Notified State Aid, and then everything else (including de minimis State Aid). Notified State Aid is grant funding that has been notified to and approved by the European Commission; in fact, the SME scheme for R&D tax credits is in itself a Notified State Aid. To help prevent Governments over-subsidising their own companies, there is a rule that no project within Europe can be in receipt of more than one form of Notified State Aid. This leads us to Rule 1.
Rule 1 – Only one form of Notified State Aid can be used per project
This means that if a project has already received State Aid (such as a SMART grant), it can't receive R&D tax relief under the SME scheme. This applies for the lifespan of the project, so accepting a State Aid grant in one year will preclude claiming SME R&D credits in all subsequent years.
Rule 2 – You can claim for State Aid-funded projects through RDEC.
If an SME has a with a State Aid-funded R&D project, it can normally claim relief under RDEC – which unlike the SME scheme is not a form of Notified State Aid. It doesn’t matter what percentage of the project has been funded by State Aid – all of its expenditure is affected. Here are a couple of examples.
Example 1: £100k project funded by £40k of State Aid.
Example 2: £100k project funded by £10k of State Aid.
In each example above, the whole project must be routed through RDEC, irrespective of how much State Aid it received.
Rule 3: Non State Aid grants split your project into SME & RDEC components.
Other forms of funding have a lesser impact on an R&D claim. Instead of forcing the whole project into the RDEC scheme, they affect only the amount they subsidise, with the balance allowed to go through the SME scheme as usual. Let’s look at a couple of examples to get a feel for how this works.
Example 3: £100k project funded by £40k of other grants.
Example 4: £100k project funded by £10k of other grants.
In each of these examples, the part of the project subsidised by the grant is routed through RDEC. The remainder goes through the SME scheme as usual.
Overall, the main things to remember are that State Aid is ‘bad’ – but not as bad as people think, as it doesn’t stop you claiming, it just changes how much benefit you get from your claim. Non State Aid is ‘good’, in that it nourishes your projects while not preventing you from claiming for the majority of your oh-so-tasty SME R&D tax credits.
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