At ForrestBrown, the entrepreneurs we help claim R&D tax relief are increasingly adept at hunting down what grants are available to them. This makes perfect sense – after all, grants and R&D tax credits are both ways in which the Government provides valuable financial support. However, as entrepreneurs become increasingly aware of the opportunities presented by both grants and R&D, we hear more and more myths about what can and can’t be done. So it seemed a good time to put to bed some of these misunderstandings about grants, R&D tax credits, and how they interact.
Myth 1: Grants and R&D are mutually exclusive. If my company has received a grant, I can’t claim R&D. If I’ve claimed R&D, I can’t get a grant.
This is probably the misconception we come across more than any other. You’d be forgiven for thinking that the Government might want to put a cap on the financial support it gave to any given business. However, the limiting factor when it comes to grants and R&D actually comes from the EU. To ensure free competition between businesses based in different European countries, Europe tries to guarantee a level playing field for European businesses by constraining the ability of national governments to give away what is called State Aid. These are subsidies which might unfairly advantage businesses in one country, and by extension unfairly prejudice businesses in other countries. If the UK, or any other member state, wants to give financial support to a business, then it must seek the European Commission’s approval – a process known as ‘notifying’ the State Aid. State Aid can include R&D tax credits, investments made under SEIS, as well as direct financial assistance such as grants for research and development, or Technology Strategy Board (now known as Innovate UK) Smart Grants.
One of the quirks of R&D tax relief is that there are actually two R&D schemes which run in parallel – one for large companies, which actually has two variations at the moment, and one for SMEs. As its name suggests, the SME scheme is only available for SMEs and only under certain conditions – but if the criteria for the SME scheme aren’t met, there is nothing stopping an SME claiming under the Large Company scheme. The SME scheme is generous enough to be considered a State Aid. As a general principle to which there are many exceptions, any company that has received a grant for a project can only claim under the significantly less generous Large Company scheme. So, in summary, if you have received a grant this will not in itself prevent you claiming R&D relief – but it may significantly reduce the value of any R&D claim you may make, which leads us neatly into the next myth.
Myth 2: Even a small grant will seriously damage my ability to claim R&D tax relief.
This myth is actually partly true. It’s true that having received a relatively small grant of a few thousand, or even hundreds of pounds could end up costing you tens of thousands of pounds further on down the line. Some grants can lead to significantly less being able to be claimed in R&D tax relief, the difference between what the less generous Large Company scheme will let you have, compared to what you could have got under the SME scheme.
But not every grant will land in you in the Large Company scheme. There are exceptions with the most common being grants that are referred to as ‘de minimis’. There are many conditions to meet before a grant is considered to be de minimis, but from HM Revenue & Customs’ perspective for grant to be considered as de minimis it needs to be explicitly stated in the relevant grant documentation. If you receive a grant, or subsidy, other than through notified State Aid (i.e. the grant is de minimis or under FP7 (see below)), then only the sum received would be subject to the Large Company scheme and the remainder of the qualifying expenditure would be subject to the SME scheme – but it’s not necessarily as simple as that and we would strongly recommend that you seek professional advice before making an R&D claim.
Myth 3: If my company has received a grant that isn’t de minimis, then I’m limited to claiming under the Large Company scheme.
This really does depend on the specific terms of the grant. Most grants tend to be project-specific. This means they are made to support a company’s initiative in a specific, fairly narrowly defined area, such as an R&D project. While the cost of this project may only be claimed under the Large Company scheme, there is nothing to prevent the costs of any other projects being claimed under the SME scheme.
Myth 4: I still don’t really understand what a notified State Aid is, but I get that it’s something to do with Europe. So, if I’ve received a grant from Europe, then it’s probably a State Aid.
Actually, nothing could be further from the truth. The idea of a State Aid was created to ensure a level playing field between businesses of different countries of the European Union. However, the European Commission isn’t bound by its own rules in this particular respect. The Commission will often make grants under what is referred to as the Seventh Framework Programme – FP7 for short – although there are other programmes. Because this financial assistance doesn’t originate from a State, it isn’t a State Aid. However, it still counts as a subsidy, so some apportionment between the Large Company and SME schemes will be necessary.
There are many different grants from many different sources out there, and if you’ve taken the time to research what’s available and maximise what is available to you, then if your company carries out R&D then it is likely to also be worth your while considering an R&D tax relief claim. As you’ll have gathered by now, although there is nothing to stop you claiming both simultaneously, the ways in which they interact are fairly complex. This is where the advice of an experienced professional who specialises in advising innovative businesses can really pay dividends – especially if you seek advice and understand the implications before you commit to a grant. Whilst it may seem it’s always in your best interests to accept grants or subsidies, the impact on other forms of relief such as R&D tax credits can be considerable, and it’s always worth seeking expert guidance before going through the application process, it could end up saving you thousands.
This is where ForrestBrown’s team of Chartered Tax Advisers can really bring value to your business, particularly due to the large variety of grants available and variation in terms and documentation provided by grant providers. It’s a complex area, and while some grants can be ignored completely it’s always worth having clear visibility of the impact they’re likely to make beforehand, even more so where small grants are concerned. A profitable SME spending £250,000 on qualifying R&D activity in their accounting period ending March 31st 2014 could expect to receive almost £62,500 in R&D tax relief against that level of R&D expenditure under the SME scheme, if the company had accepted notified State Aid worth £10,000 within the same accounting period, this could reduce the amount they are able to claim by an eye-watering £47,500. If you’re considering applying for a grant then it’s certainly worth checking the implications with an R&D tax specialist beforehand, a little forward planning can considerably reduce the impact, and could enable you to enjoy the benefits of both.