How to use Grants and R&D Tax Credits
In terms of planning, you'll find that grants are usually based on advance funding and you have to apply for them ahead of time, while R&D tax credits constitute an incentive that you can only claim after your R&D has begun. In the long term, this means that you can kick off your projects with grant funding for the first year, and then apply that year's retrospective tax credit as the cash injection for the following year. As an entrepreneurial funding cycle, these two financial products work very well together, as long as you are careful in wording the appropriate applications or claims so they don't overlap.
The UK offers two different R&D tax credits, under the RDEC (R&D Expenditure Credit) and SME schemes. However, the EU rules complicate matters somewhat, with regard to what they term 'state aid'. This is limited by the EU if such aid would give one company an unfair advantage in the market, and such state aid covers several types of grant as well as the SME scheme. The RDEC, however, does not fall into this category, so that it is possible to negotiate a path which utilises both funding types.
Government and EU grants are generally aimed at encouraging innovation. Innovate UK, for example, offers government grants to companies oriented towards research, as prizes in a business competition. Prizes are awarded for companies who create new processes, products or services, or improve their existing ones; for companies conducting collaborative research, and for the production of early feasibility studies. Such grants are awarded in sums ranging from £25,000 to £10 million and are frequently geared towards technology, but innovation is also rewarded in other kinds of development grant. Many of these grants are considered to be state aid, so you need to review your options carefully.
Other government grants which do not fall into the category of state aid are called de minimis, as they fall beneath a minimum value threshold. There are also several EU-administered business innovation grants, such as the FP6 or 7 and the €80 billion Horizon 2020 scheme. As these are EU schemes, they do not fall under the state aid umbrella, but may still have some effect on any claim for R&D tax credits.
The UK government has two R&D tax credit schemes, split generally between startups and small businesses (SME) and larger companies (RDEC). The RDEC scheme offers a lower incentive (10%), while the SME scheme is more generous (up to 33%), but this puts it into the category of notifiable state aid. SME credits may therefore be restricted if you have already received grant aid, depending on the fine print of the grant terms. It is possible in some circumstances to use both, and the RDEC can be used in combination with a grant in any event.
1. Notified state aid for non-specified projects
This type of grant is awarded with no ring-fence restrictions on what R&D projects companies can use it for. It's flexible in application, but adversely affects any claim for R&D tax credit. If claiming this type of grant, it can only be combined with the RDEC tax credit scheme.
2. Notified state aid for specified projects
In this scenario, R&D tax credits can still be claimed for other projects at the higher SME rate of 33%, and only the specified project is limited to the 10% RDEC rate when combined with the grant. Commonly claimed grants such as those from Innovate UK may be treated as notifiable state aid, unless the terms of the grant agreement are carefully negotiated to avoid it. It is possible to class such a grant as covered under GBER (General Block Exemption Regulations), which is not an outright exemption, but can make the administrative burden lighter. On an overall innovation budget of £200,000, including a £50,000 grant, you can claim more than twice as much in R&D tax credits as on a non-specific project, since you pay the RDEC rate only on the one project and the SME rate on the rest.
3. De minimis grants and other non-state funding
The best-case strategy for combining grant funding with R&D tax credits is to go for a de minimis grant (under £200,000 over 3 years), which is not classed as notifiable state aid. It must be specified in the grant documentation, but can lead to the maximum claim of R&D tax credit. Other non state-aided grants include the EU's Horizon 2020 programme, which superseded the earlier FP6 and 7 grants, under which some companies may still be claiming credits. With this combination, only the amount awarded by the grant itself (£50,000) is liable for the reduced RDEC rate, while the remainder of the R&D spending allocation can claim the higher 33% SME rate. In this scenario, the entire £200,000 R&D budget will therefore garner a tax credit of more than 25%.
Even from this brief discussion, it's easy to see that seeking expert tax advice is going to be a big part of successfully negotiating your optimal combination of tax credits and grant aid. At the Accountancy Cloud we are fully versed in all matters relating to R&D Tax Credits, and can help you to plan your innovation finance cycle to get the most out of the available funding. Our experts can help you apply for grants and negotiate grant agreements so that R&D tax credits can be incorporated to the best advantage, and not limited in future years. We can also advise you on strategies for adapting your business, in order to make your company eligible for all and any innovation grant funding and tax credits that are available. If you would like a callback please contact us.