Types of tax relief
There are currently two types of R&D tax relief for qualifying revenue expenditure – Research & Development Expenditure Credit (RDEC) for large companies and the SME scheme.
There is a common misconception that a company in receipt of a grant or subsidy cannot receive R&D tax relief. This is simply not true. The rules are as follows:
A large company can claim RDEC for the full project costs regardless of any grants or subsidies received.
For SMEs, the rules are more complex.
An SME in receipt of a notified state aid grant towards a project cannot claim SME R&D tax relief too.
However, it can claim RDEC for the full project costs. For example, a project with qualifying costs of £100,000 for R&D tax relief and the receipt of a 30% state aid grant can claim RDEC on the full £100,000.
An SME in receipt of a grant or subsidy that is not a notified state aid can claim RDEC on the funded element and SME tax relief on the unfunded element. For example, a project with qualifying costs of £100,000 for R&D tax relief and the receipt of a 30% grant (not state aid) can claim RDEC on £30,000 and SME relief on £70,000.
- Companies should always look to finance their projects in the best possible way by looking at grants and tax relief together at the outset, too often the tax relief is considered after the fact.
- Ensure grants are specific to ring fence them to projects or even part-projects allowing maximum SME tax relief for unfunded elements.
- The new Innovate UK loans are, in fact, a state aid.
- De Minimis state aid is not notified state aid so falls into the second bullet point for SMEs above.
- State aid received for a project after the SME tax relief has been claimed can be clawed back.
To conclude, grants and tax relief should not be viewed as either/or but should be looked at in the round to help companies minimise their costs of being innovative.