Your trusted adviser for R&D Tax Credits, Creative Tax Relief, and R&D Grants
When the UK was still a member state of the EU, it was subject to European rules on state aid. Since Brexit, these rules have become more complex, navigating the murky waters of legislation across the English Channel.
From pharmaceuticals to software, all industries can benefit from state aid, and all have the potential for R&D. Highly innovative companies are often in receipt of grant funding to facilitate fast scale-up. This does not prevent these companies from claiming back some of their expenditure; however, the amount they can claim back changes depending on multiple factors.
Notified state aid is state aid that has been notified to and approved by the European Commission. Notified state aids include government-funded grant schemes, like the Smart grant, but also other forms of preferential treatment, like state guarantees, direct subsidies or tax exemptions.
Unfortunately, not all government grants count as state aid, and specific guidance is not available as to which grants are or are not state aid. The best way to find out if your grant is considered state aid is to consult the grant provider.
SMEs, for the purposes of R&D tax, are companies with fewer than 500 employees which have either a turnover of less than €100 million or gross assets totalling less than €86 million. These companies can receive a benefit of up to 27% of their R&D expenditure.
As R&D tax relief through the SME scheme is considered state aid in itself, companies cannot claim this relief on expenditure that was already funded by another state aid (such as a grant). A company cannot repay its notified state aid in order to claim R&D tax relief, either.
This is to prevent the company from receiving more state than is permitted under the State Aid cumulation rules. If a company overclaimed, the excess funding could be clawed back by the EU.
Fortunately, costs not covered by state aid are not subject to the limits for claiming state aid. This means that if your funding does not cover the entirety of your project costs, the R&D costs that were not covered and thus funded by yourselves, will be eligible for the SME scheme. Just because a project was funded by state aid, doesn’t mean nothing can be claimed under the SME scheme.
The good news is, HMRC’s Research & Development Expenditure Credit (RDEC) scheme is not considered a state aid. The RDEC scheme is usually used by large companies (i.e., those above the SME thresholds) but can also be used by SMEs to gain some relief on their funded costs. This is because there is no provision under the RDEC scheme preventing subsidised expenditure from qualifying for R&D tax relief.
The RDEC scheme offers a lower rate of relief than the SME scheme, depending on the period in which the expenditure fell:
The European Commission (EC) allows state aid in specific circumstances, but generally, state aid is viewed as at odds with the common market, as it has an unfair effect on competition and trade across the European Union. Due to cert
Breaches of the EC’s state aid rules are treated seriously, leading to interest charged on the excess state aid. If you have any concerns about claiming for R&D tax relief, it’s better to play it safe and get in touch with the experts to discuss what your options are.
The EU does provide R&D grants that are not notified state aid, as they are not channelled through the UK Government. For example, the Horizon Europe funding programme has a budget of €95 billion available to highly innovative companies. This programme is not considered notified state aid, as it is delivered through the European Research Council; therefore, eligible activity can be claimed through the higher rate SME scheme.
Alas, structural funds such as ERDF (European Regional Development Fund) are controlled by the UK Government and are, therefore, state aid. Thus, R&D expenditure subsidised by such funds are ineligible for the SME scheme but still can be claimed back through the lower-rate RDEC scheme.
The EC considers that small amounts of state aid are unlikely to distort competition. Therefore, a provision is in place for companies which have received less than €200,000 over three years, which does not need to be declared to the EC.
You should be aware if this is the case, as awarding authorities should tell companies when they are receiving de minimis aid and the company in receipt of de minimis aid must keep records for 10 years of the total amount of aid received and what they used the de minimis aid for.
A company cannot claim the higher-rate SME R&D tax credit for costs within a project that are funded by De Minimis aid. However, as mentioned above, costs which are not covered by funding can be claimed under the SME scheme.
Companies which have already received de minimis aid can cumulate it with other aid, such as the SME R&D tax credit, so long as the aid intensity as set out in the state aid rules for the aid scheme they are claiming under isn’t breached. This is typically 50% of project costs. This rule applies only to the project costs, not on a company basis.
De Minimis aid results in significant complexity, so it may be beneficial to seek advice on your limits, if you believe you are in receipt of such aid.
In the November 2023 Autumn Statement, the government announced the latest changes to the R&D tax relief scheme. In a measure that has been expected for a while, the government announced that the SME and RDEC schemes would be merged into a single, RDEC-like scheme. This scheme will have a 20% credit rate (with a net benefit of 15%), in line with the current RDEC rate, and a 19.5% small profit rate for loss-makers (with a net benefit of 16.2%).
With other changes to subcontracting rules, the PAYE/NIC cap and administrative changes, the merged scheme will also favour the RDEC rules for state aid, not the SME rules, therefore companies will be able to claim R&D tax relief on their funded projects, no matter the amount or the provenance of the funding.
The new merged scheme comes into effect for claims made for accounting periods beginning on or after 1st April 2024.
Whilst the above has hopefully sketched out the main rules to consider when claiming R&D tax relief for grant funded projects, we understand that this is still a complex area within the legislation.
For any additional advice or guidance, we recommend you get in touch with the experts at Myriad Associates. With experience in making claims since the scheme’s creation, we have weathered all the changes to the scheme and our team will be happy to help you navigate this particularly complex set of rules.
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