How State Aid Affects An R&D Tax Credits Claim

It’s not as clear cut as it seems

Just because a UK company has obtained state funding before, this doesn’t preclude it from claiming R&D Tax Credits per se. It can however significantly affect the level of R&D Tax Credits the company can claim in future.

Companies looking to innovate and grow are typically keen to gain funding from a variety of sources. This is particularly true at the moment, with businesses taking advantage of additional government support during the pandemic.

How much a state-backed grant will impact an R&D Tax Credit claim depends on a number of factors. We would therefore strongly encourage applicants to think carefully about the grant support they wish to claim, against their future R&D goals.

The different “branches” of R&D Tax Credits

The R&D Tax Credits scheme is subdivided into two distinct branches. So that you can understand what effect a grant will have on your claim, it’s important to be aware of both subsections and the differences between them. The “branches” are known as the SME branch, and the Research and Development Expenditure Credit (RDEC).

Generally speaking, SMEs (companies with fewer than 500 employees and either turnover of under €100 million or gross assets of less than €86 million) should claim under the SME branch of the scheme. This offers up to 33 pence of relief for every £1 spent on R&D. Larger companies - i.e those above these thresholds -  should use RDEC. This provides relief at 9.7 pence per £1 of expenditure, although claim amounts tend to be much larger.

Sometimes however, an SME will need to claim R&D Tax Credits using the RDEC branch - if it has previously received government grant funding for example. So you see, this is why it’s important to weigh up the benefits of a grant against the potential future loss of R&D Tax Credit amounts.

Why exactly do previous grants affect R&D Tax Credits?

All state aid is divided into two types: Notified state aid and non-notified state aid. European Commission rules around state aid (which despite Brexit the UK currently still adheres to) say that because the SME R&D Tax Credits scheme is so generous, it’s classed as a notified state aid.

So that governments cannot be accused of over-subsidising their own companies, no project within Europe is allowed to receive more than one form of notified state aid (including de minimis state aid).

Additionally, companies can claim for notified state aid-funded projects if they are applying for tax relief using the RDEC scheme. SMEs that have undertaken notified state aid-funded R&D projects should typically claim using RDEC, because the RDEC scheme is not notified state aid (whilst the SME scheme is). It’s also doesn’t matter if only part of an R&D project was funded by notified state aid; when applying for R&D Tax Credits all expenditure is counted.

What about non-notified state aid?

Non-notified state aid grants divide up a project into SME and RDEC components. For SMEs that have funded a project with non-notified state aid, only the proportion that was subsidised should go through the RDEC scheme. The remainder of the project costs can be claimed using the SME scheme.

The details and concepts behind notified and non-notified state aid can be a minefield.

With this in mind, we strongly recommend you speak to our team and discuss your R&D Tax Credits claim if your company has previously received any previous state funding at all.

My company has received government support during the COVID-19 pandemic. Will this impact on my claim for R&D Tax Credits?

When the pandemic hit in the spring of last year, the government unveiled a number of financial support packages to help UK businesses survive lockdown.

Two of the schemes with the biggest take-up were the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). They are both classed fully notified state aid (the BBLS may however come under the de minimis exemption). In theory, this means that those businesses availing of this support will see an effect on any subsequent claims for R&D Tax Credits. However, as the support is designed to offer general financial support to businesses, and not specifically to fund an R&D project, R&D claims should actually not be impacted. Having said that, the range of COVID-19 support that’s been launched since then has continued to grow, so it may not always be this clear cut.

For this reason, if your company has benefitted from any type of government funding during the COVID-19 outbreak, and you’re considering an R&D tax relief claim, please do get in touch.

A note about R&D Tax Credits and the CJRS

Vast numbers of UK companies have also taken advantage of the government’s Coronavirus Job Retention Scheme (CJRS) as well as the Coronavirus Statutory Sick Pay Rebate Scheme.

The video below, explains the impact both of these schemes will have on R&D tax claims going forward.

Make sure to watch out for the red flag!

With the UK now having left the EU, will the state aid rules still apply going forward?

As with many Brexit-related issues, the details are still being ironed out. Whilst it’s very possible that over time the rules around grants and R&D Tax Credits will change, at present they still apply as they did before.

Contact Myriad Associates today

In this article we’ve outlined some of the important points around how state aid can affect your R&D Tax Credit claim. Indeed, when you come to consider grant funding, it’s important to recognise how the two will interact.

If you have any questions on R&D Tax Credits, grants or general innovation funding, please do send us a message using our contact page or call 0207 118 6045.

Why not also read up on what R&D actually is, plus find out more about the types of eligible projects and costs.