Posted: Wed 5th May 2021
The benefits of receiving free cash require no further explanation. But is it right to assume that there are no catches to consider?
There are a number of implications to weigh up, not least the impact a grant could have on the amount of Research and Development (R&D) tax credit available to your business. In some cases, grants may not just limit, but could even prevent you from claiming any of the R&D tax credit at all.
So, before you send that grant application off, consider the following key points:
Not all grants are created equal. Grants funded by the UK government, such as from Innovate UK, are notifiable state aid. Grants backed by other bodies, such as charities, are not.
Because the R&D tax credit is also considered notifiable state aid, any R&D project supported by a government-funded grant cannot also claim under the scheme. Applying for the large company Research and Development expenditure credit (RDEC) is still permitted, but this is far less generous than the R&D tax credit. You only receive 10% back from eligible expenditure under the RDEC scheme compared to up to 33% back from the eligible expenditure under the R&D tax credit scheme.
It is therefore important to consider the value of the grant. Receiving even a small, notifiable state aid grant can prevent a R&D project from being claimed by an SME under the more generous R&D tax credit scheme, and result in a much lower tax credit than if no grant had been received.
Innovation loans and innovation continuity loans are also considered to be notifiable state aid. Therefore, R&D projects funded by an innovation loan can only be claimed under the less generous RDEC scheme.
Many SMEs, in their eagerness to receive grant funding, write a proposal that's too broad in scope. This means a wide range of projects carried out by the company could be considered to be grant funded. It is important therefore to be specific, and for the grant application to be narrow and limited in scope. This ensures only R&D project work aided by the grant needs to be claimed under the less generous RDEC scheme.
To illustrate the impact of these restrictions, take for example an R&D project lasting three years, which may only receive notifiable state aid for one of those years. But for the entirety of the project's three-year life cycle, the company is restricted to claiming only on the much less generous RDEC scheme. If the project had been carefully planned and the grant application written accordingly, then a narrow portion of this overarching project could have received the grant funding, leaving the rest of the R&D programme to be claimed under the more generous R&D tax credit scheme.
Another point to carefully consider is the company's cashflow position. Because if you need the money now, then more money later from a tax credit scheme sometime in the future is less critical to the business.
R&D credits are retrospective (although it is possible to get loans against your R&D claims), while grants are often ahead of expenditure.
State aid was a critical part of the EU and the UK's Brexit negotiations.
For now, there are no changes to the interaction between the R&D credits and state aid-funded grants (or subsidies). However, as the UK continues to distance itself from the EU, this may change.
In summary, applying for grants can seem like a no brainer, but it can come with a significant downside, leaving your company worse off in the long run. There are many factors that can adversely impact a company's R&D tax credit claim. One way to mitigate this is by making sure your grant application is narrow and specific to minimise the costs that need to be claimed under the less generous scheme.
To avoid any regrets, ensure you carefully consider the situation and when in doubt it's often best to discuss your business position with an R&D tax expert before you make decisions about submitting any grant applications.