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Markel Tax

10 Jun 2019

Grant Funding and R&D Tax Interaction

How does grant funding interact with R&D tax relief?

As the SME R&D tax relief scheme is a form of notified state aid, it is always essential to know the amount (quantum) and classification (type) of any funding that your company receives. This is because only one form of state aid is allowed to be claimed per project because of anti-competition EU legislation.  Note the separate RDEC credit - for large entities or funded SME projects, is not seen as a significantly beneficial aid over your competitors, and therefore it is not deemed relevant to state aid rules.    
In practice, always obtain a statement in your awarding letter confirming the type of funding being received to ensure correct classification. This will enable future planning and foresight on how it will affect subsequent R&D tax relief claims.
It is usually only those that directly fund the R&D activity - staff wages - that cause problems. This is why obtaining the correct classification from the awarding body, or simply being aware of the classification prior to applying for a particular grant, will enable you to plan accordingly and maximise the benefits from both R&D tax relief and grant schemes simultaneously.
  1. De Minimis aid - non-notified by default, but should be logged and aggregated as part of your normal operating company practice
  2. Notified aid - typically schemes awarded by a specific government or territory e.g. Innovate UK
  3. Non-notified aid - these grants are typically European awarded funds, e.g. H2020, which may be significantly larger than local territory grants, but do not breach fair competition rules as are tendered and available to all countries across the bloc in a fair basis tender process
In assessing the effects on an R&D claim, any projects in receipt of non-notified aid must separate out the grant funding received only, and treat this amount under the RDEC rules, with the subcontracted expenditure from limited company service providers stripped out.  Subcontractors operating as sole traders, partnerships or approved qualifying bodies may still be claimable.  Staff salary apportionment, consumables, software licenses, and heat, light and power are still claimable under the SME scheme.
Regarding notified aid, any project that receives even a single pound of notified aid, both the grant subsidy and the company’s own expenditure, must be treated under RDEC rules. As with non-notified aid, limited company subcontracted expenditure must be stripped out, whilst all other cost categories receive the same treatment.
The inability to claim subcontracted expenditure on grant subsidised projects can have minimal effect if most of the qualifying work is performed in-house by salaried competent professionals. Instead, the taxable deduction claimable is just significantly reduced.  The affects can however be fatal to an R&D claim if the majority of work was subcontracted out, because the expenditure is no longer claimable under RDEC rules, and therefore must be excluded.
Deciding whether it is better to claim a funding grant or R&D tax relief is, unfortunately, not as simple as an analysis of numbers and bottom line benefit.  The R&D scheme is tax relief or cash back on historical spend, whilst grant funding is working capital towards short-to-medium term current/future projects.  Due of this, the final choice is a company-specific decision, which is dependent on a number of factors, including short term cash flow, technology-readiness level and long-term commercialisation strategy.  However, it is worth stating  the majority of grants that include CapEx, job creation, business development, and training are not relevant to R&D tax relief, and should continue to be applied for regardless on the choice to claim under the R&D tax relief scheme.
Tagged R&D tax relief
Next article in series

10 Jun 2019

End of new entrants to the Grandfathered rules in Patent Box Claims