In a previous article we highlighted the fact that there are two types of R&D Tax Credit reliefs available, i.e. the more generous SME relief which can provide up to 33.3p for every £1 of qualifying R&D expenditure and the large company Research and Development Expenditure Credit (RDEC) relief which can provide up to 9.7p for every £1.
Under normal circumstances, if your company meets the definition of an SME company then it will access the more generous SME scheme for its qualifying R&D projects. However there are two notable exceptions to this rule.
There are times when an SME company must “pretend” to be a large company for R&D tax relief purposes. This situation can arise if:
The company has received grants; and/or
The company is undertaking R&D activities on behalf of another organisation (and is being paid to do so)
The receipt of grants can significantly complicate any R&D Tax Credit claim. The impact the grant has on the claim depends on whether the grant is notifiable state aid (under EU rules) or not. If the grant is notifiable state aid, and it has been received to fund a particular R&D project, then that whole project is ‘tainted” and the company cannot make an SME claim for that particular project. All is not lost however as the company may still make an R&D tax credit claim, however it will need to be done under the large company scheme (RDEC), which unfortunately as noted above is less generous but still worthwhile.
If the grant is not notifiable state aid, or has been received directly from the EU such as a Seventh Framework Programme grant (FP7) or Horizon 2020, it may be possible to apportion the expenditure between the more generous SME claim and the large company RDEC claim. For example, if the grant subsidised 50% of the qualifying expenditure of the project, 50% of the costs may be included in the SME claim with the subsidised 50% being included in the large company claim. Note that this apportionment is not possible with notifiable state aid. If the grant was notifiable state aid and only subsidised say 10% of the expenditure, all of the costs need to go into the large company (RDEC) claim despite only being 10% subsidised. This is an important consideration to make when applying for grants as they can significantly reduce the cash you could receive from an R&D Tax Credit Claim.
Subcontracted R&D Activity
Just like grants, if you are undertaking R&D activities on behalf of another company, this could mean that you have to make a large company RDEC claim rather than an SME claim. Basically, if another Company is paying you to do R&D activities on their behalf – it could be deemed to be a funded project.
If the project is deemed to be funded in this way, a very important consideration is who has contracted you to do the work? If it is a large company or a member of a large group (>500 employees and either >€100m turnover OR >€86m gross assets) you are OK – you can still make a large company RDEC claim for the R&D work you have undertaken. If on the other hand the contracting company is an SME – you cannot make any claim – It is the contracting SME that can make the claim, not you.
Funded vs. unfunded R&D projects is a very complicated area indeed! It is not always obvious which claim your project should sit within (SME or large company). It is strongly recommended that you seek the advice of a chartered R&D tax specialist as this is an easy place to make a mistake. HMRC can and do charge penalties for incorrect returns and therefore you need to ensure that you get it right.
The above article is part of the LimeLight Campaign. Over the coming weeks we shall be posting articles to help explain what R&D tax credits are, how they work and the benefits they could have on your business. Please follow us by using one of the links below to ensure you stay up to date with future articles.
The R&D Tax Credit Specialists
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