Some of the hardest conversations I’ve had with clients have been to explain that they cannot claim the R&D tax relief that they were expecting because the company has received a government grant. This is because the Small & Medium-Sized (SME) R&D relief is a state aid and under EU rules only one state aid can be claimed for the same costs. This rule applies for the whole life of the project, even if the grant income is of limited duration. It’s true that the R&D expenditure credit would still be available, but its effective 12% tax saving is a lot less attractive than the SME R&D tax relief (effective savings of up to 43.7%).
As always with tax, the devil is in the detail. A well-worded grant application can ring fence the grant funding so that it doesn’t taint the tax relief. A grant to fund costs that are not attributable to the R&D should not affect the SME R&D relief. Similarly, if the company has more than one project, it is important to define which project the grant is for, so that the others remain eligible. Alternatively, there are EU funded research programmes, such as the Horizon 2020 or Framework programmes that are not state aids.
If you are thinking of using a government grant to fund your company’s R&D you need to consider the impact this will have on the tax position. A grant of, say, £20,000 in the first year may be attractive on the surface, but if this means a reduction in R&D tax relief of considerably more than £20,000 over the life of the project, then you may prefer to look at other ways of funding the early research (bearing in mind that other forms of funding can still have a more limited impact on the availability of the SME tax relief). Taking advice up front can reduce the risk of disappointing conversations down the line.
If you need help with any aspect of your company’s R&D tax relief claims Ensors’ corporate tax team can help. Please contact Ann Minson for further information.