Since the introduction of the R&D Tax Credits in to the UK Corporation Tax regime, there have been two strands to it – the Small and Medium-sized Enterprise (SME) scheme and the Large Company scheme. Since August 2008, the definition of SME has been a company with less than 500 employees and, either less than €100m or a balance sheet with less than €86m.
In the context of Northern Ireland, the vast majority of companies will fall into the SME category and will be able to claim under the SME scheme. Which, from a tax perspective, is a good thing! The tax man will allow you to claim an additional 125% on top of the cost of R&D activities. So if you spend £10,000 on qualifying Research and Development, you are treated as having spent £22,500 and your taxable profits are reduced (or your tax relievable loss is increased).
Under the Large Company scheme, the additional relief given on top of the actual spend is just 30% – still a worthwhile relief, but pretty much miles behind the SME scheme.
However, although the vast majority of companies who are claiming R&D tax credits in Northern Ireland meet the criterion of an SME, there is a situation when they will not be able to claim under this scheme: whenever they claim grants which are State Aid Notified.
Being a member of the EU, the UK must comply with the laws surrounding State Aid – that is, the government using tax-payers money to give assistance to one or more organisations that give them an advantage over others. The laws are generally concerned with distorting competition across the EU and aim to stem any such distortion by monitoring and measuring the money Member State governments dish out to these organisations.
There is a de minimus level of state aid – a threshold of state aid a company can receive without causing any issue. This level currently sits at €250,000 in any 2 year period.
The R&D Tax Credits are a form of State Aid. More often than not, the scheme doesn’t result in cash being given to a company (although this can happen) but the enhanced tax saving available is deemed to be financial assistance.
So, in order to try to ensure that the de minimus level of State Aid is not breached by any company claiming under the SME scheme, the government has had to exclude from the scheme any SME that was in receipt of a government grant that was State Aid Notified.
In Northern Ireland at the minute this causes a problem. Some of the most common grants available are either awarded by Invest NI or a third-party on behalf of Invest NI. And, you guessed it – they are almost all State Aid Notified.
This is unfortunate. Not least because the companies carrying out this expensive and essential R&D are exactly the ones most likely to seek and claim grant funding.
However, there are a few things you can do in order to maximise your claim to R&D Tax Credits and, if the circumstances allow for it, claim a few pound back from HMRC in cash.
1. Ask Invest NI to award your grant under the “de minimus” rules.
Up until recently, Invest NI wasn’t able to do this. All grants were dished out as State Aid notified and no-one really complained. That was until the accountants told these companies that they were losing out on the uplift in their R&D expense and potential cash payments.
So, after a bit of pressure being put on, Invest NI have found a work around and are now able to offer de minimus grants where grant funding is £100k or less.. While there seems to be an awareness of this now with Invest NI staff, make sure you ask that the grant be awarded in this way. You should still make sure that the combined grant, plus all other grants in the past two years and the tax relief don’t push you over the de minimus limits.
2. Can your R&D spend be broken down into separate projects?
It is actually possible to claim under both the SME scheme and the Large Company scheme. If a company is carrying out a number of R&D projects, any that receive grants are relieved under the Large Company scheme whilst those that do not receive government assistance are able to remain under the remit of the SME scheme.
Say for example your business is researching a new medical vaccine and it receives a proof of concept grant in relation to a piece of new equipment that is being designed to administer the vaccine. This piece of equipment is separately identifiable from the vaccine and, has its own research activities and development activities. The grant was also given specifically in relation to this equipment. So it would be treated as a separate project for R&D tax credits and, due to being in receipt of the grant would receive tax relief under the Large Company scheme. This divisibility also protects the rest of the R&D project and ensures that it can still receive the 225% relief on its spend.
3. Reject the grant. Seriously.
This seems somewhat counter intuitive but, depending on your total R&D spend, it may be better for you to reject or not seek grant funding. This comes down to the differential in the SME and Large Company scheme uplift rates (125% – 30% = 95%) multiplied by the rate of Corporation Tax (usually 20%). So, if your total R&D spend times 19% (95% x 20%) is greater than the grant amount – you’re worse off I’m afraid.
Now, this is a purely mathematical and pragmatic view of things. Naturally there are other factors to consider with grant funding. The main one being, R&D is expensive and suppliers do not accept magic buttons or well wishes in lieu of payment so if you need the cash – take the grant! Remember also that tax relief will only actually materialise if you, one day, make a profit. Grants funding can also be more valuable than potential tax relief from the point of view that it may come with some professional advice, a chance at further grant funding or an introduction to potential equity investors.
So, whilst the R&D scheme is a pretty generous tax relief, SME needs to be careful not to fall in to the trap of excluding themselves from claiming the the maximum relief possible under the SME scheme. Remember also that grants are a taxable income stream themselves. So not only might they reduced you R&D uplift, but the may in fact cancel out the uplift that you do qualify for.
As with everything in business, consider the wider context when deciding on issues of tax planning and fundraising. Never undertake a transaction solely to gain a tax benefit. Weight up all the factors, including tax, and then see what’s best for you and your business.