Is it possible to claim R&D Grants and R&D Tax Credits together? How does it work?
Businesses that are successful and innovative need money to grow. Company accountants will often be approached by organisations looking to lay their hands on any funding possible, so it’s essential that you’re in the best position to advise them effectively.
When it comes to research and development, the main pathways that companies can go down involve R&D Tax Credits (where they can either have a lump sum tax credit or a reduction in Corporation Tax liability) or an R&D Grant. Grants in particular are very appealing to new businesses or those that are only in the initial stages of developing a product or service.
We’ve found that clients quite commonly believe that you cannot make an R&D Tax Credits claim if you have already been in receipt of an R&D Grant, however this is incorrect. No matter what grant a client has received, they can still apply for R&D Tax Credits, although how much money it will be worth will vary. So, if a company has received grant funding, make sure they are aware that R&D Tax Credits could well still be open to them, as they could be missing out on a much needed financial leg-up.
R&D Tax Credits and R&D Grants
Obviously, the two types of funding contain some important differences, with a key one being timing. Grants are most usually applied before a company conducts its R&D activities, whereas R&D Tax Credits are applied afterwards. This means that grants offer the certainty of having money available from the beginning, whereas R&D Tax Credits are a bit more risky as work needs to be assessed on completion. This means that small, new companies or those which are not as profitable tend to focus more on grants.
However, ignoring the possibility of a successful R&D Tax Credits claim out of hand could prove to be an expensive mistake.
What types of R&D tax relief is available?
There are two types of R&D Tax Credits that a business can apply for. The first is the more generous SME relief that can offer up to 33p for every £1 spent on R&D. The second is the Research and Development Expenditure Credit (RDEC) scheme which applies to larger companies and can mean up to 10p for every £1 spent on R&D activities.
Can SMEs access the RDEC scheme instead?
Generally speaking, if a company meets the criteria of an SME then it makes most sense to take advantage of the specifically designed SME scheme because it’s more generous. However, there are a couple of exceptions to this rule.
There are occasions when an SME needs to “pretend” that it’s a larger company for R&D tax relief claims if:
- It has previously received one or more grants; and/or
- It’s undertaking R&D projects on behalf of a third party organisation (and is receiving payment to do so)
Therefore, the very fact that a company has received a grant does not mean it can’t claim R&D Tax Credits; it simply means that it may have to do so via the RDEC scheme which is less generous.
The impact a grant has on a company’s claim depends on whether or not the grant is classed as notifiable state aid (according to current EU rules). If it is seen as notifiable state aid, and it has been awarded to fund a specific R&D activity, then that project is “null and void” and the business cannot make an SME application for that one project. It may still be able to claim under the RDEC scheme for larger companies however, but there will simply be less money received (although it’s still very worthwhile). Finally, if your client has several projects, and the grant is only applicable to one, they might be able to apply for SME relief on all the others – the only affected one is the grant-funded project. If, however, a company has received notifiable state aid which is not in regard to a specific project, then potentially all projects can become null and void.
What about De Minimis grants?
If the grant is De Minimis (meaning it is small enough to not come under state aid) or it has been administered directly from the EU via, for example Horizon 2020 or the preceding Seventh Framework Programme (FP7), a company may be able to split the expenditure for the subsidised project between an RDEC claim and the more generous SME scheme. Instead of the entire project being “tainted” it will just be the subsidised part.
Essentially, if a business has received a notifiable state aid grant for a specific project, then that whole project must be claimed for under the lower rate. If it has received notifiable state aid that is not specific to one project, then all of the R&D activities being claimed for must also be done at the lower rate. If a business has received De Minimis aid (as an EU grant) for a specific project, then only the subsidised part can be claimed for at the lower rate, whilst the unsubsidised part (as well as all other unfunded projects) will come under the more equitable SME relief.
What about subcontracted R&D activity?
In the same way as with grants, if a company is undertaking R&D work on another organisation’s behalf, it could mean that it will need to pursue an RDEC claim instead of an SME claim. In essence, if another business is paying it to complete R&D activities for them then it could be seen as a funded project.
If the project is considered to be funded in this way, a big thing to consider is who actually contracted the company to do the work? Is it a larger company or part of a wider group for example? If yes, then that’s fine - it can still make an RDEC claim for the R&D activities it has undertaken. If the business is an SME however then it cannot make any claim as it is the contracting SME that makes the claim.
Funded vs. unfunded R&D activities can be very complicated and it’s not always obvious whether an SME or an RDEC claim should be made. It is strongly recommended therefore that accountants are completely clear on the finer details so that mistakes aren’t made. HMRC can and do pass on penalties for incorrect returns and so it’s vital that companies get it right first time.
Have a question or need further advice? We can help
Myriad UK is a firm of R&D tax advisors and grant bid writing specialists whose sole purpose is dealing with applications for R&D tax reliefs and grants. If you believe that your client’s company could benefit from R&D Tax Credits and/or an R&D Grant, and you would like to ensure you advise them correctly, please feel free to speak to the team on 0207 118 6045 or use our contact page.