How does the Covid-19 Government Support affect my R&D tax credits?

Hello,

I thought it would be useful to discuss the interaction between R&D tax credits and Covid-19 Government Support to help companies understand how to maximise their R&D claim.

Types of R&D Tax Relief

There are two types of R&D tax relief that are available:

1. The SME scheme is the more common and the more generous R&D tax credit scheme. Under this scheme a loss-making company can receive a cash rebate of up to 33% of their expenditure on R&D.
2. The RDEC scheme typically applies to large companies and is the less generous of the two schemes, resulting in a cash rebate of around 10% of R&D expenditure.

An important difference between the two is that the SME scheme is considered to be Notified State Aid, whereas the RDEC scheme is not.

What is State Aid?

State Aid is any advantage granted by government on a selective basis to any organisation that could potentially distort competition and trade in the EU. The definition of state aid is very broad because ‘an advantage’ can take many forms, including things like grants, loans and tax breaks. 

Many of the government support mechanisms available due to Covid-19 are state aid, as are Smart grants distributed by Innovate UK. However, not all government grants are necessarily State Aids and if you are ever unsure the grant provider will be able to clarify. 

State aid rules are in place to ensure a level playing field amongst businesses in the EU, to address market failures and ultimately to provide a benefit to both businesses and consumers. 

Types of State Aid

There are two types of state aid worth noting:

1. De Minimis State Aid is small amounts of aid seen as being unlikely to distort competition. The De Minimis Regulation allows businesses to obtain small amounts of aid – less than €200,000 (c. ￡150,000) over 3 rolling years.
2. Notified State Aid is aid that has been notified and approved by the European Commission. This essentially covers all state aid that is not De Minimis State Aid. 

Covid-19 Government Support Schemes

HMRC has confirmed that the schemes listed below are Notified State Aid:

• Bounce Back Loans (BBL);
• Coronavirus Business Interruption Loan Scheme (CBILS), and
• Coronavirus Large Business Interruption Loan Scheme (CLBILS)

Under EU law, once an R&D project receives Notified State Aid, the entire project (including its future lifetime) becomes ineligible for SME R&D tax relief and falls under the RDEC scheme.

For example, a loss-making start-up spends ￡100k per year on its main R&D project and usually claims around ￡33k in SME R&D tax credits each year. This year it has received a Bounce Back Loan for ￡20k and used this to fund staff and materials on its main R&D project. The entire project now falls under the RDEC scheme, meaning that its R&D rebate will shrink from c. ￡33k to c. ￡10k per year from now on.

There is a get-out clause here though, which is to use the BBL to fund ‘general support’, such as admin costs, office overheads and payment of taxes. The R&D claim would then have been unaffected, as the funds did not contribute directly towards the R&D project. Realistically though, this is hard to achieve, in particular for many of our clients which are focussed on innovation and technology and would, therefore, have spent at least some of the funds on R&D. If you do seek to rely on this get out, we would suggest that funds are ring-fenced in separate bank accounts to make it very clear how each source of funds are being used.

Future Fund

HMRC has confirmed that the Future Fund, which provides convertible loans that are commercial, is not State aid. Therefore this will not affect a company’s R&D claim.

Small Business Support Grants

Businesses operating from premises with a low rateable value may be entitled to grants from their local authority of ￡10,000 or ￡25,000 depending on the sector. These grants are considered to be de minimis State Aid.

Expenditure on R&D funded by these grants would qualify under the RDEC scheme. However, this funding can co-exist with an SME tax credit claim.

As an example, a tech startup receives a ￡10k grant and spends this on its main R&D project. It also funds the same project with ￡20k of its own money. The total spend on the project is ￡30k, of this ￡10k falls under the RDEC scheme and ￡20k falls under the SME scheme.

Summary

The table below summarises the position of each type of grant funding to help you decide the best course of action. If you have any questions please do not hesitate to get in touch :)