Companies often think they can only make an R&D claim if they have funded the entire R&D project out of their own pocket. There are some nuances of course but it is unlikely that external funding would void a claim. Companies can receive grant funding and R&D Tax Credits for the same R&D project.
Here we’re going to explain the five most common types of funding and how they impact R&D Tax Relief claims:
1. PRIVATE FUNDING (e.g. share equity or private loans)
There are no restrictions on making an R&D claim if the project is funded by a private funder with equity shares. For example:
£100k equity or debt funded into SME by director or private investor / investors
£80k spent on developing app – e.g. salaries, software licences, outsourced developers (restricted to 65%)
£80k uplifted to get additional £104k deduction
£184k can be sacrificed for a tax credit of £26.7k.
2. LARGE CORPORATE ( e.g. equity)
If an R&D project is funded by a large corporate that takes a significant portion of equity, the business can only claim via the RDEC scheme. This might be restricted even further if the R&D work was outsourced, or if the company has no PAYE bill.
For example:
£6m equity into SME from large corporation, taking 60% of the company
£1m spent on developing a prototype of a new product – staff costs, materials and consumables
Up to £105,300 could be claimed as a tax credit under RDEC.
3. GRANTS
Many companies believe that if you receive a grant, you cannot claim R&D Tax Credits for the same R&D work. This is often not the case. However, a grant will impact an R&D Tax Credits claim, and the amount that can be claim.
How it affects the claim depends on whether the grant is classified as notified state aid or non-state aid, and whether it is project specific or non-project specific. Here is a breakdown of four key scenarios:
a. Notified state aid: Non-project-specific grant
If a grant is classified as notified state aid and is non-project specific, R&D projects a business spends this funding on will not be eligible for SME relief but they can claim via the RDEC scheme. An example of such a grant is the Coronavirus Business Interruption Loan scheme (CBILS).
For example:
A £500k CBILS loan is received. The funds are not segregated by the business on receipt. £1m is then spent on a project using the £500k CBILS and £500k of company reserves. Sadly, the project only qualifies for RDEC in this case, meaning a maximum cash refund of £105,300.
If the funds were properly segregated, the project could be broken down into a number of smaller projects. There would then be scope to claim some or all of the £500k self-funded projects under the SME scheme, claiming back up to 33.35% instead of 10.53%.
b. Notified state aid: Project-specific grant
This relates to grants classified as notified state aid but they are project specific i.e. the grant is to provided funding for a specific project. Any grant funds invested in the project that are eligible for R&D Tax Relief should be claimed via the RDEC scheme. However, any other funds privately invested in other R&D projects that are eligible, can be claimed under the more generous SME scheme.
Here’s an example:
An innovate UK grant to develop a prototype machine is awarded, where 50% is covered by the grant and 50% is matched by the company using its own funds. The project cost is £1m. The £500k funded by the grant is eligible for up to 10.53% cashback (under RDEC) and the £500k self-funded element could be eligible for the SME scheme at up to 33.35% cashback.
c. De Minimis state aid grant
If a company has received less than €200,000 over 3 years, this grant may qualify as De Minimis aid under the De Minimis Regulations. This type of grant doesn’t have to be reported to the European Commission, and is not counted as state aid. However, any of the funding invested in qualifying R&D projects must be claimed via the RDEC scheme. Any private funds invested in the R&D project that are eligible, can be claimed via the SME scheme.
d. Non-state-aid grant
As with De Minimis state aid grants, any of the non-state-aid grant invested in qualifying R&D projects must be claimed via the RDEC scheme. But any other privately invested funds can be claimed under the SME scheme.
4. COVID-19 FUNDING
Since the launch of various emergency grants to help businesses through the Coronavirus pandemic, there has been some uncertainty about how these funds will impact R&D Tax Relief Claims. We can confirm these initiatives have been classified as notified state aid, and where this funding is spent on R&D projects they will not be eligible for SME relief but eligible to claim via the RDEC scheme.
It’s really important these fund are ringfenced, so there is a clear audit trail of how the funds were invested.
This is especially important with CBILS given the potential for it to bring all costs for a project within RDEC where the self-funded element might have otherwise been eligible for the SME scheme.
5. SEIS, EIS & VENTURE CAPITAL TRUSTS
If a small business has raised funds through an Enterprise Investment Scheme (EIS / SEIS) or Venture Capital Trust (VCT), they’ll need to know how these funds impact their R&D Tax Relief Claim. The good news is R&D Tax Relief can be claimed in conjunction with these funds, and there are no limitations on how those funds can be used, or the qualifying R&D expenditure.
YOUR R&D TAX RELIEF SERVICE
As you can see when it comes to funding and R&D Project, the rules are difficult to navigate when preparing a claim, but we’re here to help. For DTX’ers with a potential R&D Tax Relief client you’d like to discuss please book a scoping call here.
Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.
Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.
For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:
SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).
RDEC – the credit rate has increased from 13% to 20%.
Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.
For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.