Many SMEs claiming Research and Development Tax Relief have received state aid or grants to fund R&D projects. Depending on the nature of the subsidy, this can have a big impact on the value of the tax relief and the mechanism used to claim.
Many companies and accountants do not fully understand the rules, and this has led to a high number of claims being made on the incorrect scheme, which can have costly consequences for companies. In some cases, this can lead to time-consuming and daunting HMRC enquiries and monies having to be returned to HMRC, with the addition of interest and sometimes penalties.
We are passionate about helping companies to make complaint claims, and we have provided the following guidance to summarise the rules relating to subsidised R&D.
In essence, the impact of a grant on your R&D tax credit claim hinges on two primary considerations:
State Aid and Notified State Aid
Notified State aid is aid that has been notified and approved by the European Commission. Notified State aid includes Government-funded grants (eg. Innovate UK grants) and SME R&D tax relief.
It's essential to recognise that not all government grants fall into the category of notified state aid, and there are specific circumstances where a grant, typically considered State aid, may not be classified as such. When in doubt, your grant provider should be able to clarify whether your grant falls under notified state aid.
If your company has received notified State aid for a particular R&D project, it becomes ineligible to claim any other state aid for that same project. In other words, only one form of State aid is allowable per R&D project. Consequently, even if a portion of the project is self-funded, you cannot claim SME tax credits, as the SME scheme itself is classified as notified state aid.
However, it's worth noting that the RDEC scheme is not categorised as notified State aid. Therefore, companies can claim under the RDEC scheme for qualifying R&D costs funded by a grant. While the RDEC scheme offers a lower return, it remains a valuable option, and with the change in RDEC rates, which have increased from 13% - 20% for expenditure incurred from 1st April 2023, this will become more beneficial for many companies.
Grant Funding and De Minimis Aid
Innovate UK is the UK’s national innovation agency, and it supports business-led innovation by awarding government grants through innovation competitions. These grants range from £25,000 to £10 million.
In cases where a company has received less than €200,000 over three years, this assistance may qualify as De Minimis aid under the De Minimis Regulation. No notification or approval from the commission is necessary in this scenario, as it is not considered to impact market competition.
It's important to note that a company cannot apply for SME R&D Tax credits for the portion of the R&D project funded by De Minimis aid. However, it is eligible to claim SME tax credits for the part of the project that is not financed by De Minimis state aid. The subsidised portion of the qualifying activities can be claimed under the RDEC scheme.
Project-Specific and Non-Project-Specific Grants
Project-Specific Grants
As previously mentioned, if a company has received notified State aid for a particular R&D project, it is not eligible to apply for any other State aid for that same project (including SME tax credits, which fall under the State aid category). In such circumstances, the company can only make a claim under the RDEC scheme for the R&D project that received the project-specific grant, covering both grant funding and self-funded expenses. However, the company can still claim SME tax credits for any other R&D projects conducted during the claim period.
Non-Project Specific Grants
In cases where the grant received is non-specific, while it offers flexibility, it may limit the SME's capacity to apply for the SME scheme across all its R&D projects throughout the entire claim period. In such a situation, the company can file a claim under the RDEC scheme for grant-funded and non-grant-funded projects.
