Have you received grant funding as a form of raising finance for your business?
Have you also checked if your projects and expenditure could qualify for R&D tax credits?
If you've received grant funding then don't automatically think that this precludes you from obtaining the potential tax benefits available through the R&D work your business may have conducted. They are not mutually exclusive! This means you should still investigate to see if a R&D claim is a viable option.
Whether a grant you have received will impact on a R&D tax claim will usually depend on:
The R&D tax relief program was put in place to promote scientific and technological advancements in the UK. If your organisation engages in eligible R&D activities, you can potentially reclaim surrenderable losses back through a tax refund if your business isn't profitable.
If less than 40% of your total expenditure from 1 April 2023 to 31 March 2024 was on qualifying R&D, then you can claim 10% of those specific losses back. If R&D costs were greater than 40% of all expenditure then the refund increases to 14.5%. From 1 April 2024 the SME scheme means this requirement dropped to 30% of all qualifying expenditure. Above this level and the 14.5% refund applies.
Alternatively, if your enterprise is profitable, the R&D expenditure is applied as a relief by reducing your corporation tax liability. If your business is eligible then for every £100 spent on qualifying R&D, you can deduct £86 from related taxable profits, that's an enhanced deduction of 86% on the investment in R&D projects.
Any business, regardless of industry, can potentially claim R&D tax credits. To do so, you must be engaged in activities that improve business processes and/or develop products or services that are in areas of technical uncertainty. Many owner managers don't realise they qualify, usually due to a lack of awareness, or being too taken up with the day-to-day running of their business to have time to focus on their eligibility.
As a starting point, to understand if your projects potentially qualify, consider these questions about your R&D projects and business to ascertain if you should pursue a claim, or not. Be sure to also take a look a this piece on GOV.UK regarding the meaning of research and development for tax purposes.
In general, but not a defacto rule, we find the following sectors are quite common to R&D claims.
| Aerospace | Automotive |
| Biotechnology | Construction |
| Defence | Engineering |
| Environment | Food |
| Manufacturing | Pharmaceutical |
| Software development | University spin-offs |
Claiming R&D tax credits in the UK can be a complex process, this is especially the case if your business has also received grant funding. In such instances, it usually impacts how any qualifying R&D tax credits are calculated. This is because grants can be considered a form of state aid and as a general rule UK businesses can only claim one form of state aid.
Grants are a form of up-front funding that are usually awarded following some sort of business pitch to receive the money from a body such as Innovate UK. R&D tax credits, or relief, are the opposite, a form of retroactive tax funding whereby your business invests in a qualifying project and then you make the claim after the accounting period in which the project work was conducted.
Notified state aid is that which has been notified to, and approved by, the European Commission. It includes government-funded grants and things such as state guarantees, direct subsidies, or tax exemptions.
However, not all government grants are classified as state aid, and in some instances a grant normally considered state aid, may actually not be. To find out the status of your grant, your best course of action is to ask your grant provider.
If your business has received grant funding that is categorised as notified state aid specific to a R&D project then you may be able to claim R&D under the RDEC scheme up to 31 March 2024, and under the merged scheme from 1 April 2024. For information about these different R&D schemes, see this blog post.
Grants awarded for innovation tend to come from Innovate UK and can be for anything up to £10m. If your business has received less than €200,000 over a period of 3 years, then this may qualify as De Minimis aid.
In such a scenario your business can claim R&D tax credits for the projection of the project that is funded through De Minimis aid. However, for the portion of the project that isn't funded through De Minimis aid, you can also claim R&D tax credits.
Grants are awarded that aren't considered state aid because they aren't applied through the UK government. Examples of these include:
The first step is to supply details of the type of grant you've received. If the grant is classified as "notified state aid," per the above it will impact your eligibility for the more generous SME R&D tax credit scheme.
If your grant is not considered state aid, it may be possible to claim by identifying the portions of the project that aren't covered by the grant. Once this is done you then need to document all R&D activities and their associated costs.
You have to separate the costs covered by the grant from those that are not, for only the latter can be claimed under R&D activities. In such instances the refund is likely to be at 20% of qualifying expenditure, subject to corporation tax on the tax credit.
As you may have gathered, it's crucial to have meticulous record-keeping as part of this process so as to ensure compliance and help you maximise your claim. It's also vital to understand the interaction between grant funding and R&D tax credits in order to leverage both effectively in supporting and funding the innovative projects undertaken by your business.
Qualifying conditions from April 2024 whereby only UK costs are now eligible for R&D tax relief. This means, if non-UK payroll workers, or contractors based overseas have conducted the work towards you R&D project, then your expenditure on them doesn't qualify as part of your claim.
As this blog demonstrates R&D claims can be challenging and very complex. This is especially the case for businesses that have already received a grant. That's why an accountant can have a critical role in ensuring your claim is accurate, compliant, and helps you maximise the tax relief available.
To obtain R&D tax relief, and particularly in circumstances where a grant has been claimed, requires a meticulous review of your financial records to identify eligible R&D expenditure. Costs covered by the grant have to be ring-fenced, and set aside from those that qualify for additional tax relief. This is so that you don't inadvertently give yourself a big tax headache by claiming business expenses that have already been funded.
Working with an accountant, such as Wellers, means you can obtain strategic advice on maximising R&D tax relief, or credit, while also adhering to the rules regarding grant funding. They can help you understand the interaction between the grant and the R&D project, as certain grants may reduce the amount of qualifying expenditure, so their work will be geared to structuring your claim to optimise any financial benefits available.
Preparing and submitting R&D claim documentation is complicated! Your accountant can help you do this by providing you with detailed reports justifying the activities and expenses you're claiming. This is a critical element to obtaining a successful claim following any scrutiny by HMRC. Use of an accounting firm should therefore reduce the risk of rejection or a later tax investigation.
To navigate the intricacies of R&D claims while staying compliant with the terms and conditions of your grant, be sure to consider using a professional advisor.
One of our clients had qualifying RDEC R&D expenditure on three separate Innovate UK grant projects worth over £360,000.
A review of the terms of their Innovate UK grant revealed a stipulation that 70% of the costs were to be reimbursed back to the Awardee, namely our client. This meant the Awardee received around £252,000 back in grant funding for these projects.
On top of this, our work and analysis of their project expenses ensured these costs also generated a gross R&D tax credit of just over £60,000. The result was that £46,000 was paid back to the client in cash due to their qualifying R&D work, with a further £14,000 carried forward to offset future CT liabilities.
In essence our advice and tax services helped to boost the grant to 86.6%, as opposed to the usual 70%, which the company would not have otherwise received!
This post was created on 10/01/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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