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.
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.
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).