Can Grants & R&D Tax Credits Be Used Together?
As a startup founder, it can be challenging (to say the least) to have to constantly secure the funding to drive your business forward to its next milestone. Depending on where in the growth cycle a startup lies, state aid grants and de minimis state aid grants may have been thought about.
An important consideration before doing so is “can grants and R&D tax credits be used together?”
In this blog article we will cover this and provide all the information needed to make informed decisions in the best interests of your startup.
What are R&D Tax Credits?
Research and development (R&D) tax credits are an initiative by the UK government to incentivise UK based companies to invest in innovation. They can provide a valuable resource (in terms of cash) to businesses looking to invest in and grow their R&D.
All companies that invest in developing new products, processes or services are eligible for R&D tax credits. Companies across all sectors qualify for R&D tax credits and nobody is excluded.
The definition of R&D has been made helpfully broad by the UK government. For companies of all sizes and across all industries, if they are making “an advance in science or technology”, they may be carrying out a qualifying activity. These activities include:
· Creating new products, processes or services.
· Changing or modifying an existing product, process or service.
Additionally, R&D doesn’t have to be considered as successful for it to qualify for a tax credit.
There are two types of R&D tax credit in the UK:
Small and Medium Enterprise R&D Relief: For SME businesses with fewer than 500 staff and either: no more than €100 million turnover or €86 million gross assets. Most companies, especially start-ups, fall into this category.
Research and Development Expenditure Credit: For large companies with over 500 employees and either: no less than €100 million turnover or €86 million gross assets.
Can grants & R&D Tax Credits be used together?
Yes. Grants & R&D Tax Credits be used together and receiving a grant does not necessarily prevent R&D Tax Credits from being claimed.
Some companies think that grants and R&D Tax Credits can’t be claimed at the same time, but this isn’t true. There are various types of grants available (explained upon below) and none of them will prevent a company from making a claim for R&D Tax Credits.
Where a grant is received, it’s still highly likely that at least some R&D expenditure will be able to qualify for R&D Tax Credits.
The extent of the credits that can be claimed depends upon the classification of the grant, as will be seen below. It also depends upon whether the grant relates to a specific project or not.
What are State Aid Grants?
There are rules that prevent companies gaining an unfair advantage by receiving state aid. As such, R&D Tax Credits would usually be refused to companies having benefited from state aid grants.
Most grants by governments to companies can be classed as state aid, including a popular grant in the UK among start-ups, the Innovate UK Grant. This grant provides funding to UK based companies of between £25k and £10m. In almost all cases this grant is awarded for project-specific activities. In other words, the funding must be used in a narrow and pre-defined way.
This is important as it allows for expenditure on other projects to still be claimed towards R&D Tax Credits.
Where companies do receive non project-specific state aid grants they will be prohibited from claiming for R&D Tax Credits under the SME R&D Relief scheme and will be limited to claims under the Research and Development Expenditure Credit scheme instead.
What are De Minimis State Aid Grants?
If a government grant falls below a certain threshold, it will not be considered as state aid for the purpose of R&D Tax Credits.
De minimis can be defined as “too trivial or minor to merit consideration”.
Because a grant falls below the de minimis threshold, the relevant body does not need to be notified of it and R&D Tax Credits can be claimed for in the normal way, with there being no impact on the type of scheme being claimed for.
What are Non-State Aid Grants?
A non-state aid grant is treated in exactly the same way as a de minimis state aid grant for the purposes of R&D Tax Credits. The funding itself must be claimed under the Research and Development Expenditure Credit scheme but all other eligible R&D expenditure can be claimed under the SME R&D Relief scheme.
Unlike de minimis grants, non-state aid grants have an advantage in that there is no limit to the value that can be received, i.e., there is no funding threshold that can’t be breached.
Non-state aid grants can be provided by private companies or supra-national bodies such as the European Union.
There are huge benefits from claiming R&D Tax Credits and completing this process effectively can be transformative to your business. Not only does it unlock cash for your company to re-invest, but it also provides the UK with a pool of innovation that has a positive impact on the economy, the effects of this can be wide reaching, potentially felt across the globe.
The value of R&D Tax Credits will be calculated based on a company's R&D spend. To perform this calculation, qualifying expenditure needs to be identified from across your business and then ‘enhanced’ by the relevant rate.
This ‘enhanced expenditure’ can then be deducted from the taxable profits (or added to losses) and used to calculate the value of:
· A Corporation Tax reduction (if profit making)
· A cash credit (if loss making)
· A combination of the two
Making a claim for R&D Tax Credits can be challenging, especially if there is no experience of doing so, which is often the case in the early stages of a start-up. At this point, the added value of appointing or consulting advisors can pay dividends. Professional advisors will have the technical expertise and experience in order to ensure that all qualifying expenditure has been captured (including costs you might not even think of) and that your claim is as tax efficient as possible. The purpose of the R&D Tax Credit is to drive UK innovation, so you want to make sure you claim as much money back as possible in order to make it available to re-invest in your R&D the following year.
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If your company is looking to take advantage of R&D Tax Credits, we’re here to help. At Accountancy Cloud we offer a smart, live and personalised finance team to work alongside your business. We give founders the freedom to focus on what they love and make smarter decisions through our market leading industry experts gaining access to cash or reducing tax bills.
We provide startups with a combination of high-tech software and industry experts in order to support and maximise your R&D tax credit claim. Allowing you to get a cash injection, claim back costs and boost innovation.
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We have many years of experience within our team and this allows us to provide best-in-class support and advice for entrepreneurs, complementing your existing teams and helping you to drive growth.
Whilst we are able to carry out the accounting basics, we can also provide so much more. We work to ensure that you see the bigger picture for your business. We'll help you look at how to optimise revenue or margins, where to invest in headcount, and when to go into a fundraising round.
Through our motivated and personalised service, we can help you achieve all of your business goals. Talk to us today to see how we can help you.
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