The interaction of grants and R&D tax relief demystified

Any corporate tax adviser worth their salt will tell you that their heart sinks whenever they start looking at an R&D tax credits claim and find that the client has received some grant funding in the year.  Of course, grant funding can be an essential cash flow tool for many innovative companies, but it can be seriously detrimental to the value of their R&D tax credits claims.  It’s not all bad news, however. 

The issue revolves around the concept of notifiable state aid and the fact that a company can’t have more than one type of notifiable state aid against any particular project.  The more beneficial SME scheme of R&D tax relief is a form of notifiable State Aid, whereas the RDEC scheme that applies to large companies (and sometimes SMEs – see later) is not sufficiently generous to be considered state aid.  Hence, grant funding and SME R&D tax credits do not go well together. 

Additionally, creative industry tax reliefs, such as video games tax credits, are also a state aid, so again, if your company benefits from these, tax relief on any R&D projects may be impacted. 

If grant funding has been received, then an SME company will be precluded to a greater or lesser extent from making an R&D claim under the SME regime.  Instead, it will qualify for relief under the less generous RDEC scheme. 

The interaction of grants and R&D claims is multi-layered, so here is a simplified brief summary: 

Non-project specific state aid grant 

  • RDEC scheme will apply to all projects 

Project specific state aid grant 

  • RDEC on specific project 
  • SME scheme on all other project costs 

Non-state aid grant 

  • RDEC on grant amount 
  • SME scheme on all other project costs

If you are thinking of claiming tax relief for a project that has already received a grant, it is essential that you establish whether that grant was a notifiable state aid. The grant provider or documentation should be able to help. 

Better still, seek tax advice before you apply for your grant so any impact on tax reliefs can be considered and mitigated wherever possible. 

R&D tax credits is a constantly evolving area of tax legislation and there are currently plans on the table to align the SME and RDEC schemes under one reconfigured R&D scheme.  This could, of course, totally change everything discussed above, so please watch this space for future R&D updates.  

Now is the time to plan with your expert Dafferns R&D tax team – please do get in touch with any questions.