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 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.
Let’s take a look at the five most common types of funding and how they could impact your R&D Tax Relief claim:
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 or loans.
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 (this is restricted to 65%).
£80k uplifted to get additional £104k R&D tax relief deduction.
£184k can be sacrificed for an R&D tax credit of £26.7k.
2. LARGE CORPORATE (e.g. equity)
If your R&D project is funded by a large corporate that takes a significant portion of equity, you may only be able to 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, invested in staff costs, materials and consumables.
Up to £105,300 could be claimed as R&D tax credits under the RDEC Scheme.
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 your R&D Tax Credits claim, and the amount you can 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 you spend this funding on will not be eligible for SME relief but you 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 3 separate projects using the £500k CBILS and £500k of company reserves. Sadly, the projects only qualify for the RDEC Scheme in this case, meaning a maximum cash refund of £105,300.
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) as is the £500k self-funded element. The company also spends £100k on a separate project, which could be eligible for the R&D SME scheme at up to 33.35% cashback.
c. De Minimis state aid grant
If a company has received less than €200,000 over three 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. Any of the funding invested in qualifying R&D projects must be claimed via the RDEC scheme. However any private funds invested in R&D projects that are eligible, can be claimed via the R&D 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 R&D 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 R&D projects you spend this funding on will not be eligible for SME relief but you can claim via the RDEC scheme.
We’d recommend ringfencing these funds, 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 all projects within the RDEC scheme, where the self-funded element might have otherwise been eligible for the R&D SME scheme
5. SEIS, EIS & VENTURE CAPITAL TRUSTS
If you have raised funds for your small business through an Enterprise Investment Scheme (EIS / SEIS) or Venture Capital Trust (VCT), you’ll need to know how these funds impact your 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.
THINK YOU MIGHT BE ELIGIBLE TO CLAIM?
If you think you might be eligible for R&D Tax Relief, and you’d like to find out more about how we can help you make your R&D claim, please book a call here.
Partners with Radish Tax
We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.
Find out more about Radish Tax by Diagnostax