R&D Tax credits and Grants – how to maximise relief

Grants are an essential tool for growing a business, but did you know that by receiving a grant, it could restrict your company’s ability to claim further Research & Development (R&D) tax reliefs and incentives? In this article, Dave Philp Chiene + Tait’s Head of Research & Development Tax outlines the implications of receiving a grant and its impact on eligibility to receive R&D Tax Relief. Background reading on R&D Tax Relief, and its associated schemes (the SME and RDEC schemes) can be found in a previous article by Dave here.

There is a myth that, if a company receives a grant, it cannot claim R&D Tax relief. Whilst this is untrue, receiving a grant can throw a spanner in the works.

In a bid to guarantee a level playing field for European businesses, the European Commission restricts one Notified State Aid per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the R&D SME scheme. Any projects that have been in receipt of Notified State Aid will instead fall into the less beneficial RDEC scheme, where companies can claim 10p to the pound, rather than 33p.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme for the entire length of the project.

There are, however, some things that you can do to avoid any potential pitfalls. By following the tips below, it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant you are applying for – firstly, not all grants are classed as Notified State Aid. As such, not all grants will qualify you for the less advantageous RDEC scheme. De-Minimis Aid, which offers up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure will fall under the RDEC scheme, whilst the remaining unfunded expenditure will remain qualifying under the SME scheme.

Determine what project the grant relates to – the rules apply on a project-by-project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short-term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact Dave Philp today at entrepreneur@chiene.co.uk.

The Employment Allowance is changing

What is the Employment Allowance?

The UK Government provides an annual allowance of £3,000 to employers, which they can off-set against their employers’ (secondary) Class 1 National Insurance Contributions (NICs).  It was introduced as an incentive for organisations to help recruit their first employees or expand existing work forces in addition to providing a restriction for existing employers.

 

What is changing?

The Government has announced a change to Employment Allowance legislation effective from April 2020.  The allowance will only be available to employers with a secondary (employer’s) NIC liability of £100,000 or less.  The amendment essentially withdraws the allowance for medium to large sized organisations, it is estimated that over 100,000 employers will be affected.  Over 99% of micro-businesses and 93% of small businesses will still be eligible for the allowance.

An additional complication is that by restricting the allowance to employers with a less than £100,000 secondary NIC’s bill, the allowance will now be classified as State Aid.  Going forward, the rules on de minimis State Aid will need to be considered by employers before claiming Employment Allowance, if it applies to their organisation.  Employers will need to make sure there is availability within their sector’s state aid budget to claim Employment Allowance before they do so.

Which organisations will be able to claim Employment Allowance from next year (2020/2021 tax year)?

  • All businesses and charities paying employers’ NICs with an employer’s NIC’s liability of under £100,000
  • Linked companies with a combined employers’ NICs liability of under £100,000

 

Which organisations will not be able to claim?

  • Employers with a secondary NICs liability of over £100,000
  • Linked companies with a combined secondary NICs liability of over £100,000
  • Single director payrolls where they are the sole employee
  • Employers who have only personal, household, or domestic workers on their payroll, excluding care or support workers
  • Public bodies or businesses doing more than half their work in the public sector, excluding charities
  • Service companies working under ‘IR35 rules’ whose only income is the earnings of the intermediary

 

What should organisations do about the change?

There are five action points for employers to complete which will ensure that compliance obligations are met.  Employers must:

  • Have checked their employer National Insurance liability for the previous tax year was less than £100k
  • They have undertaken relevant checks with any connected businesses to ensure they are eligible for the employment allowance
  • Are the only connected business claiming the Employment Allowance
  • Will not exceed the relevant de minimis ceiling for state aid in their sector if they claim the Employment Allowance
  • They are not aware of any other reason why they may be excluded from claiming the employment allowance

If you have a query about the change to the Employment Allowance, contact the Chiene + Tait Payroll Team today at payroll@chiene.co.uk or call 0131 558 5800.

Grants v R&D tax credits – How to have your cake and eat it too!

In this blog David Philp in our Entrepreneurial Tax Team highlights how receiving grants can restrict a company’s ability to claim other tax reliefs such as R&D tax credits.

 

Grants form a vital part in the startup lifecycle, providing critical financial support to innovative companies. They give companies cash at a time when they are unlikely to have profits or even an income stream. The cash can be used to invest in further development, or to just keep the lights on for another couple of months.

However, as the saying goes “you don’t get anything for free” – receiving a grant could restrict the company’s ability to claim further tax reliefs and incentives.

Research & Development (R&D) Tax Relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds to startups in the early years of their development. There are two R&D schemes that run in parallel: the SME scheme and the RDEC scheme.

To qualify for the SME scheme, the company must have fewer than 500 employees and either have an annual turnover of less than €100m or gross assets of less than €86m. The SME scheme is by far the more beneficial out of the two available. For every £1 the company spends on qualifying R&D costs, the company can receive 33.35p in tax credits. This is a significantly higher level of relief than the level available under the RDEC scheme, which provides an 8.8p (which for expenditure after 31/3/17, increases to a whopping 8.9p) tax credit for every £1 spent on qualifying R&D costs (there are also further restrictions on what expenditure qualifies under the RDEC scheme).

The main issue that arises is that, as the SME scheme is so advantageous, the relief itself is deemed to be Notified State Aid. A Notified State Aid is one where the European Commission has been notified of the grant’s existence. In a bid to guarantee a level playing field for European businesses, the European Commission restricts Notified State Aids to one per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the SME scheme.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme.

This can have a disastrous effect to the availability of future relief for the company, which is best shown by the example below. Let’s assume that a loss-making fintech company (SME) is developing a single R&D project, spending £250,000 on R&D-qualifying staff costs and £70,000 on costs which were subcontracted to another company. To help with cashflow they also applied for a grant of £40,000.

Option AOption B
No Grant Received£40,000 Notified State Aid Received
Loss Making
SMERDEC
Qualifying Costs
Staff costs250,000250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligble)45,0000
Less: Grant received (ineligible under SME Scheme, instead eligible under the RDEC scheme)0 0
Qualifying costs under the SME scheme295,5000
Qualifying costs under the RDEC scheme0250,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs98,5490
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions)022,000
Grant received040,000
                                                                                                        
Total relief (R&D and Grant)98,54962,000

 

You can see that, if the grant was Notified State Aid, it would significantly restrict the total relief available to the company. In this instance, the company would have been in a better position had it not taken the “free money”. This also restricts relief for future periods. Therefore, it is imperative to consider all your options before accepting cash in a form of a grant.

There are, however, a couple of things that you can do to avoid any potential pitfalls. By following the tips below it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant your applying for – firstly, not all grants are classed as Notified State Aid and, as such, not all grants will land you in the less advantageous RDEC scheme. De-Minimis aid, which can distribute up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure would fall under the RDEC scheme while the remaining unfunded expenditure will remain qualifying under the SME scheme, as seen in Option C below.

 

Option AOption BOption C
No Grant Received£40,000 Notified State Aid Received£40,000 De-Minimis Aid Received
Loss making
SMERDECSME/ RDEC
Qualifying Costs
Staff Costs250,000250,000250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligible45,500045,500
Less: Grant received (ineligble under SME Scheme, instead eligible under the RDEC scheme)                             0                                                     0                                         -40,000
Qualifying costs under the SME scheme295,5000255,500
Qualifying costs under the RDEC scheme0250,00040,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs98,549085,209
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions)022,0003,520
Grant received040,00040,000
                                                                                                                                                  
Total relief (R&D and Grant)98,54962,000128,729

 

Determine what project the grant relates to – the rules apply on a project by project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – I might be slightly biased here but R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact David Philp today at entrepreneur@chiene.co.uk.