David O’Keeffe clarifies the confusion around whether the receipt of a subsidy or state aid for a project will prevent an SME claiming R&D tax relief for that project.
R&D tax relief for SMEs is very generous, providing an additional deduction of 130% of qualifying expenditure in computing taxable profit. For loss making SMEs there is the option of receiving a payable tax credit, which can be worth up to 33.35% of the qualifying expenditure.
It’s important to ensure that R&D relief is claimed (many companies don’t claim), and that the correct expenditure is included. The legislation covering the SME relief (CTA 2009, Part 13) contains an exclusion for expenditure that has been subsidised in any way. This means that the receipt of any subsidy in respect of the R&D project expenditure will result in a restriction of the expenditure eligible to be included in the claim for R&D relief.
State aid or subsidy?
There is an important distinction to be made between a general subsidy and a subsidy which qualifies as notifiable state aid:
- The receipt of state aid will result in the exclusion of all of the relevant project expenditure from the R&D claim, under the SME regime.
- A subsidy which is not state aid will only result in a restriction of allowable expenditure on a pound for pound basis from the R&D claim.
Any amount of expenditure that is excluded from the SME claim, due to the receipt of a subsidy, can be included in a claim under the R&D Expenditure Credit (RDEC) regime. Relief under RDEC is generally claimed by large companies, and it is significantly less attractive than the relief due under the SME regime. However, it is a small comfort in practice.
How to identify state aid
It’s essential to identify whether or not amounts received by the company constitutes a notified state aid. This means state aid notified to and approved by the European Commission (CTA 2009, s1138(2)).
State aid is not completely prohibited by the EC. The EC recognises that some aid is beneficial and state aid can be paid if it is approved by the EC.
Examine the paperwork
The first step, when looking at a grant or any other funding that might be state aid, is to consider the documentation associated with that aid. The aid provider should know whether or not the particular aid constitutes state aid and importantly, whether or not it has been notified to, and approved by, the EC.
It should be quite simple to include a statement in the documentation to the effect that the aid is (or is not) state aid. Regrettably, this is not always the case in practice.
There are exceptions to the requirement to notify each grant of aid and receive approval in advance, such as the General Block Exemption Regulation (GBER).
GBER allows an aid provider – for example InnovateUK in the UK – to submit details of an aid programme in advance to the EC and receive a general approval for that scheme. InnovateUK, in this example, can then distribute the aid to recipients without having to notify each individual grant to the EC.
Although the aid given to a specific recipient hasn’t been notified, it is still state aid. Receipt of any aid covered by the GBER will still result in all of the expenditure on that relevant project being excluded from the SME R&D regime.
De minimis aid
The other exception is in respect of de minimis aid. The EC has determined that in many cases small amounts of aid will not distort competition and therefore, should not be subject to the requirement to notify.
The default de minimis level is €200,000 measured over a rolling period of three years, but this level is reduced for certain sectors. The aid provider should ask the recipient about de minimis aid granted in that year, and the previous two years, in order to confirm whether the relevant de minimis threshold will be breached.
It is not possible to treat a small award of aid as de minimis simply because of its size. If the aid provider has not specified the award as de minimis aid (having first checked the recipient’s de minimis aid history) then it is not de minimis aid, regardless of its quantum.
EC regulations require that the recipient be informed in writing of the aid’s de minimis character. This statement should be in the aid documentation provided to the recipient.
From an R&D relief perspective, de minimis aid is not notified state aid. The receipt of aid that is genuine de minimis aid will be categorised as a general subsidy. This will result in a pound for pound restriction of the eligible expenditure rather than a total exclusion of all the expenditure from claim.
Direct aid is not state aid
State aid is aid that is provided by a member state. If the aid is provided directly from EU funds then it cannot ever be state aid. The EU’s Horizon 2020 programme is a good example of such aid. It is not state aid but it could, of course, still represent a subsidy of R&D expenditure.
If the company is in receipt of a state aid then, unless it is de minimis aid (stated in the aid documentation), there can be no SME R&D claim for that project. Aid granted under a GBER scheme will still be notified state aid even though the specific grant of aid does not have to be notified.
Better information needed
It would be very nice if aid providers and HMRC could cooperate to ensure that recipients are given better, and more accurate, information in aid documentation concerning the state aid status and the implications for R&D relief.
I have seen at least one grant award document for an award that was clearly state aid that stated that the recipient might also be eligible for R&D relief. This statement is not actually incorrect, it is possible that the recipient could make a claim under the RDEC regime, but it is potentially misleading for many recipients.
About David O'Keeffe
I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.
I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief. In that time, I have developed an enviable level of knowledge of R&D tax relief both from a technical and a practical perspective. I established KPMG’s specialist R&D tax relief team and was a founder member of KPMG International’s Global R&D Tax Incentives Group and was a member of the Steering Group, with direct responsibility for the EMEA region.
I have provided input and consultation to many organisations and trade bodies. I was the only R&D tax specialist to have input to Sir James Dyson’s influential 2010 report "Ingenious Britain: Making the UK the leading high tech exporter in Europe" which is seen as the catalyst for reform of the UK’s R&D Tax Relief regimes. I have been a member of HMRC’s R&D Consultative Committee, a group with representatives from Government (HMRC, HMT and BIS) as well as industry, advisers and professional bodies, since its inception. I sit on CIOT’s CT technical Sub-Committee and chair the R&D Working Group of that sub-committee.
I was involved with the consultation process leading to the introduction in 2013 of the UK’s patent box regime. Since then I have helped his clients assess the merits of making a patent box election and then, where appropriate, to claim the benefit of the relief. More recently, I have actively contributed to the consultations around the design of the changes to the UK’s patent box to make it compliant with the OECD’s nexus requirements.
Formerly a Tax Partner with KPMG LLP (UK), I retired in 2011 to establish Aiglon Consulting.