Having Your Cake & Eating It: How to Receive R&D Tax Credits AND Grant Funding
If your client wanted to claim R&D tax credits and receive grant funding for the same project within the same tax year, what should you do:
- Run for cover, or
- Read this post
If your client has received grant funding for a particular piece of R&D work or project but is looking for an additional source of revenue (without diluting their equity of course), then they should definitely consider claiming for R&D tax credits too.
But wait a minute: You can’t receive both R&D tax credits and grant funding for the same piece of work, can you?
Receiving R&D tax credits AND grant funding: The truth
It’s a common misconception that companies can’t apply for both grant funding and R&D tax credits for the same project.
This misunderstanding can be forgiven though. The rules surrounding innovation grants and R&D tax credits are notoriously complicated.
The government-backed R&S schemes are designed to ensure that companies receiving state aid don’t get an unfair advantage over others in the market. Therefore, many companies assume that receiving multiple funding from various forms of state aid would therefore give them an unfair advantage, so why bother trying?
But it is possible. In fact, there are three ways that it is possible.
Receiving R&D tax credits AND grant funding: The golden rule
Before we get into the three ways your client can receive both grant funding and R&D tax credits, we need to establish what the basic golden rule is.
You can’t receive R&D tax credits and funding if both are classified as “notified state aid”
Companies can’t receive more than one type of notified state aid for the same project.
For instance, if your client has received a notified state aid grant from an institution like, Innovate UK, then they won’t be able to receive R&D tax credits under the SME branch of the R&D tax claim scheme. This is because the SME R&D tax scheme enables companies to claim a large percentage (33%) of their eligible R&D costs and is, therefore, classified as notified state aid.
However, if your client was to make a claim under the RDEC strand of the R&D tax credit scheme, then they would be eligible to receive both. This is because the RDEC scheme only pays back 13% of eligible costs and is, therefore, not seen to be giving companies an unfair advantage and not counted as notified state aid.
Receiving R&D tax credits AND grant funding: The secret
Although your client can still receive both R&D tax credits and grant funding regardless of what type of grant or R&D credit scheme they choose, if their project has been funded by a notified state aid grant, then they will only be able to claim R&D tax relief under the RDEC scheme. This is because the scheme offers them a significantly lower percentage of their eligible R&D costs. So, this means they’ll get less support than they would if they were able to claim under the SME scheme.
So, the trick to maximising your client’s R&D tax credit and grant funding entitlement is to carefully choose the type of grant to apply for.
Ideally, they’d want to apply for and receive a non-state aid grant, or a de minimis grant as they’re often called. If they do this, they can apply for R&D tax credits under the SME scheme and get up to 33% of their eligible costs back on top of their grant funding.
But, if you’re reading this, I’m guessing your client has probably already received their grant funding?
If I’m right, chances are they’ll fall into one of the following three scenarios:
Receiving R&D tax credits AND grant funding: The worst-case scenario
If your client has received ‘notified state aid for non-specific projects’, it means they are completely disqualified from claiming any R&D tax relief under the SME scheme. They can only claim under the RDEC scheme.
Let’s say that your client spent £200,000 on their R&D project and they’d received a £50,000 non-project specific notified state aid grant. The amount they’d be able to claim under the RDEC scheme would only be around £20,000.
Although this amount is significantly less than if they’d been able to claim under the SME scheme, it’s still money that could go towards future R&D activities.
Receiving R&D tax credits AND grant funding: The complicated-case scenario
If your client has received ‘notified state aid for specific projects’ they won’t be able to claim all of their costs under the SME scheme, but they will be able to claim some of them.
Basically, the eligible costs for the project that’s being funded by the state aid grant can only be claimed under the RDEC scheme. But, for projects outside of this, they can still claim for costs under the SME scheme.
This is how it might work:
Let’s use the earlier example and say your client has spent £200,000 on their R&D project. But this time, they’d received a £50,000 project-specific notified state aid grant. Although they’ll only be able to use the RDEC scheme to claim for the R&D costs associated with the project they won the project-specific grant funding for, they will be able to use the SME tax relief scheme for any other project costs.
This will make a huge difference to your client, financially. In addition to the £50,000 worth of grant funding, they could also receive an R&D tax credit worth up to £43,000.
Receiving R&D tax credits AND grant funding: The best-case scenario
If your client has received a non-state aid grant (or a de minimis grant), from saying Horizon Europe, then it’s time to celebrate. This is by far the best-case scenario for them as it will allow them to claim the maximum amount of R&D tax credits.
Although the funding received from a de minimis grant will only be compatible alongside the RDEC scheme, any self-funded money that is spent on the same project can be claimed under the SME R&D tax credit scheme.
Let’s stick with the same numbers and assume your client has spent £200,000 on their project and has received a non-state notified grant for £50,000. Only the value of the grant will need to be claimed under the RDEC scheme, the rest – even if it was spent on the project that the grant money funded – can be claimed under the SME scheme.
So, using the figures above means that £150,000 of their spending would be claimable under the SME scheme and the remaining £50,000 claimable under the RDEC scheme.
This would give them an R&D tax credit worth up to £54,500! This is nearly 10% greater than the original grant!
Receiving R&D tax credits AND grant funding: The conclusion
The key to getting the maximum amount of innovation funding for your client is to secure a non-state aid grant.
But this might not be so easy. To take the pressure off and make life a little easier, why not reach out to an R&D tax specialist for support?
R&D tax credit experts, like Myriad Associates, will be able to look at your client’s situation, assess their options and advise on the best way forward. They can even help with grant applications and filing R&D tax returns.
Get in touch by calling them on 0207 118 6045 or dropping them a line.
This article was brought to you by Tax Cloud
Tax Cloud is the world’s first online, self-service R&D tax credit portal. Designed to help you file your clients' R&D tax returns effortlessly, without the expense of hiring a specialist, Tax Cloud is backed by the R&D experts at Myriad Associates, so you’ll get their support through the entire claims process.