Grants, such as those from Innovate UK, can be an excellent way to raise finance for R&D projects. However, Small/Medium Enterprises (SME) need to be aware that grants can also severely restrict how much Research and Development (R&D) Tax Relief can be claimed. This is because when a project receives notifiable state aid grant funding, all of its costs must be claimed under the Large Company, R&D Expenditure Credit (RDEC) scheme, which is much less beneficial than the SME version.
This is because when a project receives notifiable state aid grant funding, all of its costs must be claimed under the Large Company, R&D Expenditure Credit (RDEC) scheme, which is much less beneficial than the SME version.
Consider the following example: a loss-making SME spends £100,000 on an eligible R&D project but hasn't received any grant funding. They can expect to receive 33% or £33,350 back in a payable tax credit under the SME R&D Tax Relief scheme.
Loss making SME Eligible R&D spend £100,000 No state aid grant funding
If instead, the company receives just £10,000 in notified state aid grant funding for the same project, all of the £100,000 must be claimed under the RDEC scheme. In this case, the company could expect to receive only £10,530 back in payable tax credit under RDEC . The end result would see the company receive £22,820 less than if they had received no state aid grant funding. And even taking into consideration the grant funding, the total benefit would be lower than had they not received a grant.
Loss making SME Eligible R&D spend £100,000
One point to carefully consider then is the company's cash flow. Does the business need the money now or later? R&D credits are in retrospect (although it is possible to get loans against your R&D claims), while grants are often ahead of expenditure.
We often see investors, that are backing low revenue or pre-revenue businesses, pushing these companies to apply for grants. Does the investor fully understand the implications of this grant funding and has the Finance Director modelled the impact on any future R&D tax claims to ensure the maximum benefit is received overall?
It is extremely important to understand therefore, the implications that any grant funding will have on how a project can be claimed under the SME R&D Tax Relief Scheme for the current and any future years on the same project.
Below we provide four important questions to consider before applying for a grant.