Subsidised Research and Development Expenditure

By now most companies are aware of the very generous tax credit available for expenditure incurred on research and development, recently increased to 230% from 1 April 2015. I will not recount how to arrive at the qualifying costs or the conditions for making a claim and instead will concentrate on an area I am finding companies are not fully aware of: how does a grant or subsidy received in relation to the research and development activity affect any claim? This small question can have a very large impact on a potential claim.

As per Part 13 Section 1138 of Corporation Tax Act 2009 subsidised expenditure can fall into different categories as defined as:

  1. State Aid, notified and approved by the European Commission,
  2. Any other grant or subsidy (other than notified State Aid) that is met directly or indirectly by a person other than the company.

Both of the above have different implications on the claim available.

If you receive any State Aid under 1 in relation to a certain project then no claim can be made under the Small and Medium Enterprise (SME) Scheme.  This could lead to a company being significantly worse off having taken the State Aid.  If a company had, for example, incurred £500,000 of qualifying Research and Development expenditure a claim under the rates from 1 April 2015 would give rise to an extra corporation tax saving of £130,000. If on the other hand a grant had been received from the Government of £50,000 then no SME claim could be made. Therefore it is very important to carefully consider any grant before accepting it when it comes to Research and Development.

If you receive a grant or subsidy under 2 there is however more flexibility to make a claim. When taking the above example of £500,000 of qualifying expenditure but changing the £50,000 grant such that it is not State Aid, the £50,000 of expenditure covered by the grant cannot be claimed under the SME scheme but the remaining £450,000 can be.

Now all hope is not lost for making an R & D claim for the disallowed proportions as noted above. Indeed a claim can in fact be made using the Large company rates as there is no provision relating to disallowing subsidised expenditure, as long as the following conditions are met:

  • the expenditure would have been allowable had the SME been a large company, and
  • the expenditure does not qualify under the SME scheme only because it was subsidised (including a notified state), and
  • the expenditure is incurred in an accounting period beginning on or after 9 April 2003.

Unfortunately the rates are not as generous under the Large scheme, currently 130%, however it is still worth maximising the claim and a claim under both schemes can be made in the same year.

Therefore the following claims would be submitted for each of our examples above:

Notified State Aid
SME Claim £Large Claim £Total Claim £
Qualifying expenditure0500,000500,000
Claim amount0150,000150,000
Tax Saved030,00030,000
Grant or Subsidy
SME Claim £Large Claim £Total Claim £
Qualifying expenditure450,00050,000500,000
Claim amount585,00015,000600,000
Tax Saved117,0003,000120,000
No Grant
SME Claim £Large Claim £Total Claim £
Qualifying expenditure500,0000500,000
Claim amount650,0000650,000
Tax Saved230,0000130,000

It is therefore very important to carefully consider receiving subsidies or grants that relate to Research and Development expenditure, especially State Aid. It is also always worth asking what type of grant you are receiving from the grantor, as sometimes even if it is from the Government it is not denoted as State Aid.

In the above examples it has been demonstrated that the company would in fact be worse off if it had received the State Aid but they are better off for receiving the subsidy after accounting for the £50,000 received from the grant.

Barnes Roffe can assist in this area to ensure any savings are maximised and the correct claims are made.

Talk to Barnes Roffe today
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