Can I claim R&D Tax Credits for grant-funded projects?
The good news is that R&D Tax Credits/Relief can also be claimed on grant funded projects.
It is a common misconception to believe that if a company has received a grant it cannot claim R&D Tax Credits/Relief for the same development work, however, it is important to understand that the relationship between the two can be complicated, and that the degree of R&D Tax Credits that can be claimed will depend on a number of factors, including both the classification of the grant and which R&D Tax Relief scheme you are claiming under – this is why specialist advice is usually required to ensure you are gaining the optimum benefit.
The level of R&D Tax Credits/Relief you can claim will depend on if your grant is classified as:
- Notified state Aid – that is not project specific.
- Notified state aid – that is project specific
- A De Minimis state aid grant
- A non-state aid grant
This is because ‘Notified state aid’ is a form of Government funding regulated by the European Commission in line with state aid rules which limit the level of financial aid each country gives domestic businesses in order to maintain a level playing field across Europe.
How different types of grant affect your eligibility to claim and the benefit received under the two R&D Tax Credit schemes.
There are two R&D Tax Credit schemes available, the Small and Medium Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme, and the eligibility to claim under one or the other depends upon a number of factors, the most common being the ‘size’ of your company – or the group of which it forms a part – in terms of headcount, turnover and gross asset value.
The SME scheme which returns up to 33p of tax credit for every £1 spent, compared to just over 10p with RDEC is classified as Notified State Aid (NSA) and access to it will therefore be restricted for a company receiving grant funding which is itself considered to be NSA. The nature of any restriction will depend upon the nature of the grant and any specific conditions associated with it and so whilst access to claim under the SME scheme may be limited, the benefit of the RDEC legislation can still be exploited as a source of tax credits, albeit at the reduced rate.
The key criteria which determine the restrictions on any given grant are;
- Whether or not the award is project-specific; and
- The value and timeframe of the funding received.
1. A Non-project specific grant
2. A project specific grant
3. De Minimis Aid / other non-Notified grants
The table below provides an illustrative example of how the choice of grant can significantly impact the benefit of R&D Tax Credits.
| Type of Grant | |||
| Non-Project specific | Project X-specific | De Minimis / other non-NSA | |
| RDEC scheme | |||
| Eligible compliant expenditure in period | 100% of costs incurred across ALL activity | 100% of costs incurred on Project X | De Minimis value stated in grant documentation |
| Expenditure | £400,000 | £200,000 | £100,000 |
| Benefit | £38,880 | £19,440 | £9,720 |
| SME scheme | |||
| Eligible compliant expenditure in period | 0% of costs incurred across ALL activity | 100% of costs incurred on all other activity | Balance of costs incurred on all other activity |
| Expenditure | £0 | £200,000 | £300,000 |
| Benefit | £0 | £49,400 | £74,100 |
| Total Benefit (£) | £38,880 | £68,840 | £83,820 |
As each kind of Grant would impact your R&D Tax Credit claim, in order to maximise your innovation funding, it’s highly beneficial to get expert advice from a specialist company such as Innovation Tax beforehand as structuring this correctly can make a significant difference. And as Grants invariably precede innovative work, whereas R&D Tax Credits come later, the earlier you do this the better, as you may also be able to benefit under the UK Patent Box scheme which reduces Corporation Tax to just 10% on profits from the worldwide sale of Patented inventions.
HOW CAN WE HELP?
It can be challenging to submit an R&D tax credit claim to HMRC’s exacting standards. At Innovation Tax our team of experienced sector specialists, technical and quality assurance experts and tax professionals will help you identify the full extent of your qualifying activities and expenditure and work with you to ensure the correct information is included in the claim documentation, giving you peace of mind that your claim is robust, maximised and defensible.