A common question we are asked by businesses is, “Can I claim research and development (R&D) tax credits and grant funding at the same time?”
There is a common misconception that a company in receipt of a grant or subsidy cannot receive R&D tax relief. This is simply not true. The answer is yes—it is possible to claim R&D tax credits for a grant-funded project. The interplay between the two schemes can be complex, however, so it’s important you receive the correct advice to ensure your claims are optimised.
SME vs RDEC
There are two types of R&D tax relief for qualifying revenue expenditure—Research & Development Expenditure Credit (RDEC) for large companies and the small and medium-sized enterprise (SME) scheme.
The SME R&D tax relief scheme is classed as notified state aid (NSA) whereas the RDEC tax relief scheme is not.
What does this mean?
Traditionally, most UK-funded grant projects are considered NSA and, as the SME R&D tax scheme is also NSA, you can’t claim more than one form of NSA for the same R&D project. However, the grant-funded project can be claimed under the RDEC (large company) R&D tax relief scheme.
The rules are as follows:
- A large company can claim RDEC for the full project costs regardless of any grants or subsidies received.
For SMEs, there are a couple of things to consider.
- An SME in receipt of an NSA grant towards a project cannot claim SME R&D tax relief too. However, it can claim RDEC for the full project costs. For example, a project with qualifying costs of £100,000 for R&D tax relief and the receipt of a 30% state aid grant can claim RDEC on the full £100,000.
- An SME in receipt of a grant or subsidy that is not a notified state aid can claim RDEC on the funded element and SME tax relief on the unfunded element. For example, a project with qualifying costs of £100,000 for R&D tax relief and the receipt of a 30% grant (not state aid) can claim RDEC on £30,000 and SME relief on £70,000.
Innovate UK loans are also classed as an NSA.
If you are an SME receiving state aid grant funding towards an R&D project, the entire project is eligible for R&D tax credits under the RDEC scheme. For any R&D projects outside of the grant project, you can still claim R&D tax credits at your normal qualifying rate (SME/RDEC).
If your business is receiving non-state aid grant funding, including de minimise aid and other subsidies, it can claim under the RDEC scheme on the funded element and the SME scheme on the unfunded element.
To conclude, companies should always look to finance their projects in the best possible way by looking at grants and tax relief together at the outset—too often the tax relief is considered after applying for a grant of low value that may not have been the best option. Grants and tax relief should not be viewed as either/or but should be looked at in the round to help companies minimise their costs of being innovative.
Companies should ensure grants are specific to ring-fence them to projects or even parts of projects allowing maximum SME tax relief for unfunded elements.
With the recent R&D tax relief rate changes, it is more beneficial than ever before to seek grant funding as well as make a claim for R&D tax credits.