Changes to R&D Tax Credit payment thresholds from April 2021
The rules regarding R&D tax credit claims for the SME scheme are changing from April 2021 and it could affect the ability of many small businesses to obtain this important tax relief.
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R&D Tax Credits and Grant Funding - The correct treatment
R&D Tax Credits and Grant Funding - The correct treatment
R&D Tax credits can be difficult to understand at the best of times but add grant funding to the pot and it can get very confusing and, in many cases, very costly if they are not understood and treated incorrectly.
Government grants and EU grants tend to be awarded to encourage innovation, and innovation is the context in which we are looking at grants here, so other grants for marketing or local development are not considered.
There are two high-level types of grants: those that are considered state aid and those that aren’t. This is important as which grant you get awarded with have a large impact on the R&D funding you can claim.
Innovation grants
UK government grants for research orientated companies are awarded by Innovate UK. These are distributed via competitions in which UK-based businesses pitch and winners are selected.
Grants can range between £25,000 and £10 million. These will often be technology grants, but other types of development grant are given if innovation is taking place. In many circumstances, these will be considered state aid.
De minimis grants
There are some types of government grant which are not considered state aid as they are below a de minimis threshold: these are known as de minimis grants.
EU Grants
The EU themselves distribute innovation grants for business under their Horizon 2020 scheme – with a budget of €80 billion – and the older FP7 and FP6 schemes. As these are not sourced from member states, they are not considered state aid, but will still affect an R&D tax credit claim.
So, how do grants affect R&D tax credits?
There are two R&D schemes: nominally, one for SMEs, and one for large companies. The SME R&D tax credit scheme has a more generous rate of tax credit – up to 33p for every £1 spent on R&D. The rate of the large scheme – the research and development expenditure credit (RDEC) – is now at 13% (less corporation tax) so it’s worth just over 10p for every £1 spent on R&D.
Because of the generosity of the SME R&D tax credit scheme, it is considered notifiable state aid. This means its use may be restricted where a company has received a grant. RDEC is not considered state aid so is not restricted by grant funding. This does not mean that grants and R&D tax credits cannot be used together – just that in some cases the lower R&D tax credit rate must be used.
On the face of it this seems straightforward, but there are three possibilities in how a grant can affect a SME claim, which is based around the wording of the grant and the type of aid it is.
- Non-project specific state aid (where a grant is not ring-fenced for specific activity).
- Project specific state aid (including Innovate UK and GBER funding).
- Grants limited in size, known as de minimis funding (not considered state aid).
1. non-project-specific notified state aid
A non-project-specific state aid grant is one which has been awarded to a company with no ring-fencing as to which R&D projects it can be used for. This would be a common situation where the company is focused on only one project or product, such as a start-up. From a R&D tax credit perspective this is the worst-case scenario.
The effect of a non-project-specific grant is usually that any R&D carried out by a company must be considered under the RDEC scheme for R&D tax credit purposes.
The first diagram shows an example based on £100,000 of R&D expenditure, with a £25,000 non-project specific notified state aid grant. Essentially all spend goes into the same ‘pot’ and claimed as RDEC. Not great, but better than nothing!
2. Project-specific notified state aid
This time, you receive a notified state aid grant, homever, in this instance it is allocated to one specific project, but you are carrying out R&D on other projects too. This could be an InnovateUk grant, but the grant is in essence awarded to the project, not the whole company.
In the second example we see another total R&D spend of £100,000 and a £25,000 grant. This time though, the grant is project specific. The effect is that only this project is considered under the RDEC scheme, meaning the remaining projects can be considered under the scheme.
The result is significant, with the company doubling the R&D tax credit without any increase in expenditure.
3. De minimis and other non-state aid
As stated at the beginning of this article, de minimis and EU aid is not classed as state aid, which leads to the best-case scenario.
De minimis, H2020, FP6 and FP7 are all treated in the same way when it comes to R&D tax credits, as they are not notified state aids. The grant money itself would be considered under RDEC, but it does not prevent the rest of the R&D spend being considered under the SME R&D tax credit scheme.
With the last example we can see that the R&D spend, and grant funding are unchanged, but the overall benefit has gone up to £27,383.
Clearly, the key to maximising your innovation funding is to seek a grant that is not classified as notified state aid.
Summary
For companies looking to maximise their innovation funding, there is clear merit in getting expert advice. You can explore whether you can structure your grants in this way and put together a high-quality R&D tax credit claim. The earlier you do this, the better.
As the detail of this article shows, companies that fail to get expert tax advice on grants and/or R&D tax credits risk losing out. Most often, we see cases where clients have been advised incorrectly that grants and R&D tax credits cannot be used together, grant funding classed as SME spend (this would be breaking the law), or all R&D spend claimed under the RDEC scheme when some could have been claimed under SME
It is important, then, to use an expert adviser! As you can see we have experts to deal with these complex claims so if you need our services please contact us.
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