By Kevin Bailey, PhD, Technical Analyst at Jumpstart
R&D tax relief exists to support companies attempting to move their industry forward, achieving an advance in a field of science or technology through the resolution of scientific or technological uncertainties. A reward for taking financial and technological risk amounting to a credit of up to 33% of the qualifying expenditure identified on eligible R&D projects. A reward that is paid after submission and acceptance of a claim when accounts are finalised, and the company’s tax return is submitted.
Types of funding
However, some companies may want to reduce the risk of undertaking R&D before expenditure is committed, and therefore look towards other forms funding for business ventures, such as venture capital funding, loans, donations and subsidies. Although this funding may take a form that has some impact on the taxable benefit received through the R&D Tax relief scheme, it will not preclude a company from making a successful R&D Tax relief claim, merely the amount of benefit that the claim may attract. This often comes as a pleasant surprise to companies, enabling an initial reduction of risk associated with an R&D project, and providing a further influx in cash, or a reduction in corporation tax liability when final accounts are submitted.
Surely if my company receives state aid from the government for a development project it can’t receive a further tax break on the expenditure it incurs on the project?
Absolutely untrue! Although notified state aid will prevent a company from claim R&D tax relief under the SME Scheme, a claim may be made in respect of qualifying expenditure under the RDEC Scheme. Under this scheme the company will receives a net 8.8% of its eligible expenditure identified on the project by way of a payable credit! Similarly, if a company is in receipt of de minimis funding, then it may be possible to claim the unsubsidised portion of the eligible costs through the SME R&D Tax relief Scheme (receiving up to 33% of the costs by way of a cash credit) and claim the subsidised element through the RDEC Scheme (returning an 8.8% net benefit on this element).
What about if another company pays my SME company to undertake R&D?
Well, it depends on the circumstances but in most cases a claim for R&D tax relief can still be made. It is only where another SME specifically subcontracts R&D to your company that prohibits any claim. Even in these cases, there may be scenarios where your company has to undertake R&D at its own technological and financial risk and outwith the terms of the contract agreed by your customer. In these cases, you may still be able to claim for the R&D emergent from the contract through the SME scheme. However, if a large or overseas company subcontracts R&D activities to your company, your company may still be able to make a claim through the RDEC Scheme. You get paid for undertaking R&D on behalf of your customer and receive a further tax break for the development work! It sounds too good to be true!
Similarly, if you receive a subsidy in advance of commencing an R&D project, then only that project expenditure up to the amount of subsidy must be claimed under the RDEC scheme, any eligible expenditure beyond the level of this subsidy may be claimed through the SME scheme.
What about venture capital funding? How does this impact my company’s ability to claim R&D Tax Relief?
Well, although it may impact on the amount of benefit received from an R&D tax relief claim, but it won’t prevent a successful claim from being made. The key consideration here is whether the company can be considered as an autonomous company engaged in R&D. A recent Tribunal has ruled that Venture Capital Companies (VCC) can acquire up to 50% of an SME, without SME status being affected. Beyond this level, the VCC should be considered as a linked enterprise, and consequently the SME status of the company may be affected, requiring a claim to be made through the RDEC scheme.
This is why it is always good practice to discuss any plans for grant funding and investment with your R&D Tax Consultancy provider to assess the impact on future R&D tax relief claims. It is not unusual for the taxable benefit of a robust claim for a qualifying project claimed through the SME Scheme to outweigh the benefit received from a small, notified state aid and the requirement to claim further development work on that specific project through the RDEC Scheme.
