Grant Funding and R&D Tax Credits

Grant funding can affect your R&D tax credit claim, depending on whether it’s notified state aid, and whether a it’s project-specific grant.

The relationship between grant funding and R&D tax credits is changing with the move to the merged scheme R&D expenditure credit (RDEC) and the Enhanced R&D Intensive Support (ERIS) scheme for accounting periods starting on or after 1 April 2024. 

The fundamentals haven’t changed—whether a grant impacts your tax credit claim still depends on whether it’s notified state aid or non-state aid, and whether it’s project-specific or not. However, the new schemes are designed to simplify certain business complexities.

In this article, we explore how these changes affect grant-funded R&D claims under the old SME and RDEC schemes and the new merged RDEC and ERIS schemes, providing clarity for businesses navigating this transition period.

Timing of grants and R&D tax relief

Grants are a form of upfront funding and are awarded via competitions through Innovate UK – the UK’s innovation funding body. Businesses will have to make a successful pitch to receive a grant from Innovate UK.

Conversely, R&D tax credits are a retrospective tax incentive i.e. a business would claim after the accounting period in which the R&D took place.

What is Notified State Aid?

If your business receives notified state aid for an R&D project, you cannot claim any other state aid for that same project. Notified state aid refers to government support that has been approved by the European Commission. Common examples include:

• Government-funded grants, such as Innovate UK grants.
• SME R&D tax relief (under the SME scheme).

For accounting periods on or after 1 April 2024:

1. Merged RDEC Scheme
   • Similar to the old RDEC scheme, the merged RDEC scheme is not notified state aid.
   • Businesses can claim relief on grant-funded R&D under the merged scheme, simplifying the process for projects that previously defaulted to the RDEC scheme.
2. ERIS Scheme:
   • The ERIS scheme is not notified state aid, providing a more flexible route for SMEs to combine grant funding with R&D tax relief.
   • SMEs can claim ERIS relief for qualifying costs, including those funded by grants, without being restricted by the notified state aid rules that previously applied under the SME scheme.

For accounting periods before 1 April 2024:

1. SME R&D tax relief
   • The SME scheme is classified as notified state aid.
   • If a project received notified state aid, such as a grant, the SME tax credit could not be claimed for that project. However, any part of the project not funded by the grant remained eligible for SME tax relief.
   • In cases where a project was entirely grant-funded, the RDEC scheme could be used instead, as it is not notified state aid.
2. RDEC Scheme
   • The RDEC scheme is not notified state aid.
   • Businesses receiving state aid for specific R&D projects could claim RDEC tax credits for the grant-funded portion of their R&D costs.

Tip: If you’re unsure whether your grant qualifies as notified state aid, consult your grant provider or review the grant documentation. Understanding these classifications ensures your R&D tax credit claims remain compliant and optimised.

Grant funding and De Minimis Aid

Grants awarded under de minimis aid rules provide smaller, less market-distorting forms of government support. Examples include grants awarded through Innovate UK competitions.

Key points:

• The de minimis limit is generally €200,000 over three years, increasing to €300,000 for ERIS claims under the new scheme.
• Businesses must track the total amount of de minimis aid received to comply with these limits.

Impact on R&D Claims:

• SME Scheme (Pre-Merge): A business could claim SME tax credits for the portion of the project not funded by de minimis aid.
• Merged RDEC Scheme: The removal of restrictions on subsidised expenditure simplifies claims, enabling businesses to claim full relief for grant-funded and self-funded R&D.
• ERIS Scheme: De minimis rules apply to the additional benefit received under ERIS compared to claiming under the merged RDEC scheme.

Project-specific and non-project-specific grants

The classification of a grant as project-specific or non-project-specific is a critical factor in determining how businesses claim R&D tax credits.

Project-specific grants

If the grant is linked to a specific R&D project:

• Under the old SME scheme, the project would be ineligible for SME tax credits but could claim under the old RDEC scheme.
• Under the merged RDEC scheme, the project can claim relief for both grant-funded and self-funded portions.
• Under ERIS, grant-funded R&D may still be eligible for relief, as ERIS is not notified state aid.

Non-project-specific grants

If the grant is not tied to a specific project:

• Under the old SME scheme, all R&D activities in the claim period would be affected, and claims would default to the less favorable RDEC scheme.
• Under the merged RDEC scheme, this is simplified, enabling claims for both grant-funded and non-grant-funded R&D.
• ERIS claims are also possible, with the additional benefit calculated against what would have been claimable under the merged scheme.

Summary

Three scenarios for grant-funded R&D claims:

1. Company Receiving a Non-Project-Specific Grant
   • Old SME scheme: Limited claims to RDEC for all R&D projects.
   • Merged RDEC scheme: The company can claim full relief for all R&D projects.
2. Company Receiving a Project-Specific Grant
   • Claims under RDEC (or merged RDEC) for the funded project.
   • Other projects in the same period can still claim under SME or ERIS (if eligible).
3. Company Receiving a Non-State Aid Grant
   • Under both old and merged schemes, the company can claim SME tax credits for self-funded R&D and RDEC for the grant-funded portion.

Grant funding in a changing world

The introduction of the merged RDEC scheme and ERIS scheme has simplified many complexities associated with grant-funded R&D. However, businesses must remain vigilant in classifying their grants and understanding how these classifications affect their R&D tax credits.

At EmpowerRD, our team of R&D tax credit experts are here to guide you through this transitional period. Whether you’re claiming under the old schemes or preparing for the merged scheme and ERIS, we’ll help ensure your claims are optimised and compliant.

Contact us today for tailored advice on your grant-funded R&D tax credit claims.