Supercharge your grant funding with R&D credits

Business couple applying for grant funding with R&D credits in an office

Have you received grant funding? If the answer is yes, the chances are that your business is doing something innovative. It's also a good bet that some extra funding would come in handy - it's often expensive carrying out research and development (R&D)

The good news is there are other sources of funding available. Better still, there are some you may not have realised could work for you. There's a common misconception that being in receipt of grants prevents you benefitting from other sorts of funding - in particular, R&D tax credits.

Here we clearly explain what you can and can't do when using R&D tax credits in conjunction with grants. One thing is for certain; if you qualify for R&D tax credits, you should certainly consider making a claim.

Why the confusion?

First of all, it's important to understand that there are two R&D tax credit incentives:

  • the SME R&D tax credit scheme, which provides a benefit of up to 33p for every pound spent on qualifying costs;
  • RDEC (Research and Development Expenditure Credit), which is worth up to 10p for every pound spent on qualifying costs.

They have different qualifying criteria, but where possible you would naturally seek out the more generous SME R&D tax credit.

EU rules say that it would be unfair for a company to receive certain types of grant - called "notified state aid" - in addition to the generous SME R&D tax credit. For anyone who is not an expert in this area, this often leads to confusion. There is, therefore, a false perception of a blanket ban on the combined use of R&D tax credits and grants.

While there are some restrictions when it comes to SME R&D tax credits, there are no such restrictions in the use of the less generous (but still valuable) RDEC. Therefore, at the very least, this is always an option for you to explore where you've received a grant.

However, there are also different categories of grants available. Some have less of an impact on an R&D tax credit claim than others. Choose the right grant, and have it documented correctly, and you can actually make use of the generous SME incentive.

Three ways grants and R&D tax credits can work together

Broadly speaking, there are three positions in which you may find yourself. Even in the least advantageous position, you can still claim some extra funding.

1. Claiming RDEC only

Here you have received the least favourable type of grant - non-project-specific notified state aid. This will usually lock you out of the SME R&D tax credit incentive across your whole business.

However, you are still able to claim RDEC. This will give you a tax credit worth nearly 10% of your R&D spend, including the money sourced from the grant.

2. Claiming some SME credits as well as RDEC

Here, your outlook is brighter. You have still received notified state aid, but the grant is specific to a project. This means that only the grant-funded project is restricted to RDEC claims.

Because of this, any other qualifying R&D projects can be considered under the more generous SME incentive. This hybrid approach means you'll get a 10% benefit on some qualifying costs, and up to a 33% benefit on the rest.

3. Heavy use of SME tax credits, topped up with RDEC

The third position that you could find yourself in is the best of all. You can achieve this by receiving a grant that the EU does not consider notified state aid. This can either be because it falls under a minimum value (€200,000 over a rolling three-year period), or because the EU has given out the grant itself ("de minimis aid").

Here, you would be almost entirely free to claim SME R&D tax credits. The only money that would have to go through RDEC is the grant funding itself.

Don't leave it to chance

You will perhaps see why there has historically been some confusion over your eligibility for R&D tax credits when receiving grant funding. But by working with a specialist, you can strategically plan to put yourself in the best position to benefit from both grants and R&D tax credits. It can make a huge difference to the total level of funding you may receive.

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