It's possible to obtain grant funding and also claim R&D tax relief, but certain grants can significantly impact the level of R&D tax relief available.
Innovative companies often seek support from a variety of different sources – we frequently come across clients who are eligible to claim R&D tax relief who have also received grant funding. This is especially the case now as so many companies have accessed the various Covid-19 support packages offered by the Government. It is possible to obtain grant funding and claim R&D tax relief but it is important to appreciate that certain grants can have a significant impact on the level of R&D tax relief available. We would encourage companies to ensure this impact has been considered in advance of applying for grant relief.
The different R&D schemes
To understand the impact of grant funding on R&D tax relief, it’s necessary to appreciate the difference between the two R&D schemes. R&D relief for SMEs (essentially companies with less than 500 employees and either a turnover of less than €100m or gross assets of less than €86m) provides 24.7p of relief for every £1 spent on R&D, whereas the relief for large companies available under the RDEC (Research and Development Expenditure Credit) provides relief at 9.7p per £1 spent. Clearly there is a considerable difference in the level of relief available.
There are occasions where a SME has to claim under the RDEC scheme – the receipt of certain grant funding is one of these – and so it is easy to see how the receipt of a grant in this case could impact on the R&D relief available.
Type of Grant
Notified State Aid
When looking at the impact of grant funding on R&D claims, the first point to determine is whether the grant is Notified State Aid. The SME scheme is so generous that, under current EU regulations (and who knows how this will change post Brexit?) it is itself deemed to be a State Aid. EU law prohibits a company from receiving more than one State Aid for a specific project. Therefore receiving even a penny by way of a Notified State Aid grant for an R&D project would prohibit a company from claiming R&D relief for that project under the SME scheme. Once the grant has been received, it’s too late – a company can’t repay the grant to get back into the SME scheme – so this must be considered in advance.
What determines whether a grant is Notified State Aid?
This depends on detail within competition law and can be complex to determine; as a general rule of thumb, grant funding administered by a national or local government is likely to be State Aid, whereas grants administered directly by the EU or from non-governmental sources e.g. charities are not. However, even if a grant is State Aid, it may not be Notified State Aid because it falls within one of a number of exemptions from notification; the main one we come across being the De Minimis exemption.
Non- Notified State Aid
Where a company receives grant funding which isn’t Notified State Aid, the impact on R&D claims can be less costly. Relief remains available under the SME scheme for the net qualifying costs incurred by the company; and as a bonus, relief is available under the large scheme for the grant funded costs.
Innovation Limited, a SME, incurs staff costs of £200k on a qualifying R&D project. The company would receive the following contribution to it’s R&D spend in each of the circumstances:
|Grant funding (£)||R&D relief – SME scheme (£)||R&D relief – RDEC (£)||Total contribution to R&D (£)|
|No grant received||0||49,400 (£200k x 24.7%)||0||49,400|
|Notified State Aid £20k||20,000||0||19,400 (200k x 9.7%)||39,400|
|Non-Notified State Aid £20k||20,000||44,460 ((200k-20k) x 24.7%)||1,940 (20k x 9.7%)||66,940|
In this case, the company is worse off receiving the Notified State Aid than if no grant had been received at all. The optimal position in this example is if the grant received by the company is not Notified State Aid.
Covid-19 Support and Impact on R&D
The government have provided a number of different support packages to help UK companies survive the impact of Covid-19 and the subsequent lockdown.
The Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) are both fully Notified State Aid (although the BBLS may fall under the De Minimis exemption). However, to the extent the loans are for general business support and not specifically an R&D project, there should be no impact on any R&D claim.
It’s also worth mentioning furlough payments at this point. These are not considered to be State Aid as they are available to all businesses, however there can still be an impact on the R&D claim. To the extent that employees who work on R&D projects are furloughed, it’s important to ensure this is taken into consideration when calculating the percentage of their time spent on R&D, with any time spent on furlough clearly not being time spent on R&D projects. (This is more likely to be an issue for future periods.)
Hopefully this article has set out some of the points which need to be addressed when considering applying for grant funding. If you have any questions on R&D, grants or how the two interact, please contact one of the Radius team.
Unsure whether you qualify for R&D Tax reliefs? Why not download our quick and simple eligibility checker. A short series of questions will let you know within 10 minutes of your time whether you could be able to claim. Download your copy of the guide to find out.
- R&D Tax Credit Eligibility Checklist - our easy 10 minute guide to find out whether you are eligible to claim
- R&D Qualifying Costs
- R&D tax relief explained
- Download your copy of the Shorts 2020 Tax Saving Guide