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.
However, the SME scheme (which returns almost 25p in refunded tax – or up to 33p of tax credit – for every £1 spent, compared to just under 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 may 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
The award of NSA funding which isn’t ring-fenced for a specific project leads to the least beneficial outcome since, whilst it still allows the company to claim R&D tax credits, ALL compliant activity carried out for the duration of the grant can only be considered under the RDEC legislation.
Now suppose the grant was awarded to fund a specific project(s); a common example would be that made by Innovate UK (formerly known as a Smart Grant). In this scenario, only the expenditure incurred in undertaking the named project(s) would be subject to RDEC legislation, whilst expenditure incurred on all other, non-funded activity would remain eligible for relief under the SME rules. This would be a hybrid claim made under both the SME and RDEC schemes.
3. De Minimis Aid / other non-Notified grants
‘De Minimis’ Aid is defined as a grant of less than €200,000 over a three-year period which does not have to be reported to the EU. One example is the Horizon 2020 scheme, which is awarded direct from the EU having replaced the Sixth and Seventh Frameworks (FP6 & FP7) and is the EU’s largest-ever innovation programme, with c.€80bn reserved to secure Europe’s global competitive edge in innovation.
With De Minimis Aid, restricted relief under RDEC legislation is limited only to the specific value of the grant; all compliant expenditure incurred in excess of this amount would qualify under the SME scheme. However, it’s essential the ‘De Minimis’ conditions are specifically written into the funding documentation, rather than assume that all grants of less than €200,000 over a 3-year period would qualify as ‘De Minimis’.
The table below provides an illustrative example of how the choice of grant can significantly impact the benefit of R&D Tax Credits and assumes overall expenditure across all compliant activities of £400,000, of which £100,000 was grant funded; 50% (£200,000) of this total was incurred undertaking Project X.
|Type of Grant|
|Non-Project specific||Project X-specific||De Minimis / other non-NSA|
|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|
|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|
|Total Benefit (£)||£38,880||£68,840||£83,820|
In order to maximise your innovation funding, it’s highly beneficial to get expert advice 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.
Call Innovation Tax on 0203 813 4600 or email to firstname.lastname@example.org if you would like to discuss your options further.