Can grants and R&D tax credits be used together?

As a startup, you’re probably constantly in search of funding to fuel your business. Depending on the stage of your business, you might have been looking at state aid grants, de minimis state aid grants or else.

A question you may have is whether grants can create any issue with your R&D claim?

The good news is that grants and R&D tax credits can be applied for in tandem, it’s a common mistake to believe that if a company has received grants it cannot claim R&D tax credits.

The extent of R&D tax credits that can be claimed will depend on many factors, including the classification of the grant, if the grant was received for a specific project or for the company as whole and more. Also it is important to understand that there are 2 types of R&D tax credits schemes:

(1) the generous SME R&D tax credits which allows to claim up to 33% of the eligible R&D spend (normally for small companies, up to 500 employees); and

(2) the slightly less generous RDEC R&D tax credit which allows to claim only up to 13% of the eligible R&D spend (for bigger companies).

Even in the event where the grant received might create an issue with your R&D tax credits (see below for more details) – the RDEC R&D tax credits can still be used. In this article we’ll try to explain this.

Project-specific state aid grants

To avoid a company gaining unfair advantage within the EU market – the EU rules limit the level of state aid a company can receive. So state aid would usually disqualify a company from getting R&D tax credits.

Many government grants fall into the category of state aid, in the UK one of the most popular grants among tech start-ups that fall into this category is the Innovate UK grant.

The Innovate UK grant is often offered through competitions and is open to all UK-based companies. Innovate UK awards funding to the winners of these competitions. The funding will vary between £25,000 and £10 million.

In most of the cases the state aid grant, including the Innovative UK grant is project-specific, and in this case, you can still claim expenditure on other R&D projects undertaken by the company, which have not been funded By Innovative UK, under the generous SME R&D tax credits, resulting in up to 33% of the eligible R&D spend. And then the other eligible costs on the project which received the grant can be claimed only under the RDEC scheme, yielding a 13% R&D tax credit rate.

Example:

Company A has 2 R&D Projects:

R&D Project A:

Received a project-specific state aid grants: £20K
Received further funding from investors: £20K
Total: £40K.
Hence: for this £40K only up to 13% of the eligible R&D spend can be claimed – under the RDEC scheme.

R&D Project B

Received funding from investors: £160K
Total: £160K.
Hence: The whole £160K can claim up to 33% of the eligible R&D spend – under the SME scheme.

Result: up to £160K*33%+£40K*13%

Non project-specific state aid grants

In other scenarios, where the state aid grant is non project-specific (i.e. given to the company or the founders without specific project in mind), the more advantageous SME Tax Credits scheme (whereby the company can claim up to 33%) cannot be used.

The company will be only able to claim R&D tax credits under the RDEC claim, up to 13% of their spend on the R&D projects.

Example:

Company A received a non project specific state aid grant of £20K and £180K of equity funding from investors.

Total £200K.

Company A has spent £200K on 2 R&D Projects: Project A and Project B.

Result: for the whole £200K only up to 13% of the eligible R&D spend can be claimed – under the RDEC scheme.

Result: Up to £200K*13%

De minimis state aid grants

Some types of government grants will not be considered as state aid for the purpose of R&D tax credits, because they fall below a de minimis threshold (i.e. less than €200,000).

Now since this is not considered as a state aid the grant doesn’t need to be notified to the EU. These are known as de minimis grants. With de minimis grants all the money spent on R&D tax credits (apart from the value of the de minimis grant itself) is eligible for the R&D tax credits under the advantageous SME Tax Credits scheme.

Example:

Company A has 2 R&D Projects:

R&D Project A:

Received a de minimis grant: £20K
Received further funding from investors: £20K

Total: £40K.

hence: for this £40K only the value of the de minimis grant (£20K) will be subject to the 13% of the eligible R&D spend – under the RDEC scheme. The additional £20K will be subject to 33% of the eligible R&D spend – under the SME scheme.

R&D Project B

Received funding from investors: £160K

Total: £160K.

Hence: The whole £160K can claim up to 33% of the eligible R&D spend – under the SME scheme.

Result: £180K*33%+£20K*13%

Final Tip:

Make sure to plan to which grants you apply, and make sure to carefully read the grant documentation, as the type of grant you receive may impact your R&D tax credits, and it’s worth asking to narrow your grant to a specific project whenever possible etc.