A helping hand with the great grants vs R&D tax relief funding dilemma
Tuesday, 14th August 2018Guest blog by Jumpstart
There’s no reason why UK companies shouldn’t be up there with the best in the world when it comes to innovative research and technology. Thanks to the Government’s R&D tax relief scheme and an array of grant funding opportunities, financial assistance is never far away. Just be careful what you wish for, especially if you’re an SME.
Although they might both sound like the answer to your funding prayers, grants and R&D tax relief aren’t always compatible. If managed correctly though, they can be combined to provide immediate cash flow AND greater returns in the long term.
The key point is that the moment you receive a penny of notified state aid, for any part of an R&D project, you’re automatically excluded from claiming R&D tax relief under the SME scheme. Why? Because for the SME scheme, R&D tax relief is regarded as state aid itself. Instead, you’re pushed into the much less generous Large Company RDEC scheme. So, instead of being able to claim back between 25% and 33.35% of eligible expenditure when calculating their profit for tax purposes, SMEs have to make do with the 8.9% ceiling level offered by the RDEC scheme.
Even a subsidy from a source other than state aid (such as FP7) will have an effect – any parts of the project you’ve funded yourself can go through the SME scheme, but all subsidised expenditure must go through the LC scheme.
The maths that matter
Whether you’d be better off with a grant, R&D tax relief or a combination of both depends on two things: your eligible expenditure and the size of the grant.
Simplistically speaking, no one is going to turn their nose up at a grant of £250,000 towards their R&D since, in this case, there’s a good chance the benefit would outweigh the difference between the SME and LC schemes. It’s the small grants that can be a problem. Say you have £100,000 of eligible expenditure – under the SME scheme, your R&D tax relief return could be up to £24,700 and £33,350 (depending on your company’s financial position) but factor in a £1,000 state aid grant, pushing you into the RDEC scheme, and your return suddenly drops to just £8,900!
Time for a little more number-crunching.
Bypassing the either/or scenarios above, when might a carefully considered combination of R&D tax relief and grants prove beneficial?
Company “A” and company “B ”are both spending £50,000 each year on three different projects (annual eligible spend £150,000). Both companies received £15,000 of notified state aid toward these projects.
| Company “A” submitted an application for £5,000 grant toward each project | Company “B” submitted an application for one grant of £15,000 toward one project | |
| Spend | £150,000 | £150,000 |
| Annual Claim | £150,000 through RDEC | £100,000 through SME scheme
£50,000 through RDEC scheme |
| 8.9% of eligible spend | 24.7% of £100,000
8.9% of £50,000 |
|
| £13,350 per year | £29, 150 per year | |
| 3 year benefit | £40,050 | £87,450 |
Of course there are some exceptions to the rule.
Grant funding won’t, for example, affect your ability to claim under the R&D tax relief SME scheme if the grant in question is de minimis state aid (an un-notified state aid of less than €200,000 over a rolling three-year period) or if the grant is used to fund an area of the project, such as marketing or commercialisation, which doesn’t fall under HMRC’s definition of R&D. To avoid any confusion and save your company a lot of money, you must make it crystal clear in your grant application that the money won’t be used in any aspect of the R&D in a project.
Then there are all the other pros and cons associated with grants vs R&D tax relief – money received upfront vs claimed retrospectively, very strict vs relatively open eligibility criteria, and an expectation of success vs an acceptance of failure.
Get some help.
It’s a complex area, full of potential pitfalls, where it pays to talk to an expert – someone like Jumpstart who deals with these dilemmas day in day out and who has secured over £100 million of pounds in R&D tax relief for its clients.
Our technology-based approach to claim preparation is undertaken by PhD qualified Analysts with extensive industry experience in their own specific fields of science or technology. Our Technical Analysts are not only industry sector experts, but equally knowledgeable when it comes to HMRC’s legislation, ensuring maximised, accurate and robust claims.
In a climate where the value of claims being disputed by HMRC has grown by almost 400% over a twelve-month period, the fact that we offer free enquiry defence as standard on every claim we prepare and submit gives our clients a cast-iron security.
To arrange a free consultation to discuss your own R&D tax relief specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the Jumpstart team on 0131 240 2900 or [email protected].