It's a popular myth that you cannot claim UK Government's Research & Development (R&D) tax credits if you have received grant funding. This is not strictly true, the grant funding will change how much you can claim under the R&D schemes, but the receipt of grant funding does not necessarily rule you out from claiming R&D tax relief or credits.

Many innovative and pioneering companies, especially those that are under five years old, have to secure a mix of finding from different sources in order to survive and grow. Both grant funding and R&D tax relief or credits are important sources of funding, along with equity/share investment and loans, so it's important to get the facts straight. The key points to keep in mind are listed below.

There are two R&D tax relief/credit schemes:

  • RDEC (Research and Development Expenditure Credit) which is for large companies that is companies or groups of companies with over 500 employees in the relevant R&D claim year.
  • SME R&D tax credits for Small & Medium Enterprises (SMEs) that is companies or groups of companies with under 500 and either under €100m turnover or under €86m on their balance sheet in the relevant R&D claim year.

Both schemes will provide a benefit based on the level of R&D expenditure in each accounting period/year.

The main difference is the rate of benefit each yields:

  • RDEC claims provide a cash benefit worth around 9% of the qualifying R&D costs.
  • SME R&D claims typically provide a profitable company with a cash benefit worth 26% of qualifying R&D costs (i.e. £26 for every £100 spent); while loss making SMEs can get a cash benefit worth up to 33% of their of their qualifying R&D costs.

The figures above are applicable at 2016/17 corporation tax rates.

In summary the rules are:

  • You can't claim SME R&D relief for any qualifying R&D project costs that have been subsidised by a grant, but you may be able to claim them under the RDEC scheme (read on).
  • If the grant subsidy was not notified State Aid, you can a) claim under the SME R&D scheme for any extra costs not subsidised by the grant and b) claim the grant subsidised element under the less generous RDEC scheme.
  • If the grant was classified as State Aid and goes above the de minimis State Aid level you must claim the entire grant funded qualifying R&D project costs under the RDEC scheme.

Grants that are not classified as state aid includes de minimis State Aid - this is state aid up to the de minimis value of €200k over a rolling three year period, Horizon 2020 or Framework Programme funding. Grant providers will be able to tell you if the grant you have received is classified as State Aid.

Here are three scenarios showing how the receipt of grant subsidy impacts on an SME's R&D tax credit claim:

Example where the grant funding was notified State Aid

 

Total qualifying R&D project costs £300,000
Grant funding received that is classifed as State Aid £200,000
Qualifying cost claimable under the SME R&D scheme £0
Qualifying cost claimable under the RDEC scheme £300,000

 

If the company was profitable this would yield a total R&D claim valued at around £26,000.

Example where the grant funding was NOT notified State Aid

 

Total qualifying R&D project costs £300,000
Grant funding received (not State Aid) £200,000
Qualifying cost claimable under the SME R&D scheme £100,000
Qualifying cost claimable under the RDEC scheme £200,000

 

If the company was profitable this would yield a total R&D claim valued at around £43,000.

Example where there was no grant funding

 

Total qualifying R&D project costs £300,000
Grant funding received £0
Qualifying cost claimable under the SME R&D scheme £300,000
Qualifying cost claimable under the RDEC scheme £0

 

If the company was profitable this would yield a total R&D claim valued at around £78,000.

Where companies are in receipt of State Aid above the de minimis we advise them to define their R&D projects as tightly as possible, so the other R&D projects not receiving State Aid can still be claimed under the SME R&D scheme.

Read more about claiming R&D tax credits here www.cobizfunding.co.uk.