How R&D Grants can affect your ability to claim R&D Tax Relief...

One of the other main ways that the UK Government incentivises R&D, other than through the R&D Tax Relief scheme is through the Technology Strategy Board (TSB) Grant Scheme.

We don't offer assistance with these grants mainly because it gives rise to a fundamental conflict of interest for a provider that offers both services. Is your provider going to recommend what's best for you or the scheme that gives them the larger fee? The conflict arises because the TSB scheme is fundamentally incompatible with the SME R&D Tax Relief scheme. They both fall under the category of Notified State Aid (NSA) and according to EU regulations an R&D project is not legally allowed to receive multiple NSA as this is effectively double-incentivising the same piece of work.

We therefore advise companies considering what is their best option, to avoid TSB grants as there are a number of reasons why claiming R&D Relief is usually better for them.

  1. R&D Tax Relief can be claimed for 2 years back, whereas grants are claimed in advance for a specific project. The numbers involved are therefore usually much larger for an R&D claim.
  2. Grants are usually on the basis of committing to matched contributions, which can affect your cashflow in future years, whereas R&D relief is based on what you have actually spent according to your business need
  3. Receiving a grant for any part of a project precludes claiming R&D tax relief on the entire project. So, if you have a project covering multiple years, claiming a small grant in one year can prevent you claiming R&D Tax Relief in each subsequent year. This is particularly problematice in small companies with one product where 'the company is the product'
  4. Grants get allocated at fixed intervals during the year. Clients typically receive R&D Tax Relief within 8 weeks of us beginning an engagement.
  5. Many grant assistance companies take their fees up-front, regardless of whether they succeed or not. We only charge when you receive the refund from HMRC and we work on a no-win no-fee basis. You are therefore never out of pocket.

Some grant assistance companies may tell you that claiming TSB grants is really not a problem - you can be an SME claiming under the Large Company Scheme and indeed the official advice (point 52 herehere) says the same thing.

This is  disingenuous - it is both true, and, at the same time, fundamentally unhelpful for many SMEs who do not realise the significant differences between the SME scheme and the Large Company Scheme.

The most important difference is that under the Large Company Scheme, the ability to surrender enhanced losses in return for a cash credit is simply not there. In simple terms, there is no cashback.

What you can get under the Large Company Scheme is enhanced losses (currently 130% in the 2011/2012 tax year) which can be used immediately if you are profitable or carried forward for use against future profits. So in other words, if you are profitable now or expect to be so in the future, then there may be an advantage in claiming under the Large Company Scheme to reduce your current or future tax bill. If not, you are effectively paying a provider to build up losses in your company that you will have no use for in the next few years.

But it's worth remembering that even if you are profitable, for a company paying tax at the 20% small companies rate, claiming the 130% enhanced deduction of the Large Company Scheme, will give a benefit of 6% of the R&D expenditure. The same profitable company claiming under the SME scheme can claim a 225% enhanced deduction, giving a benefit of 25% of the R&D expenditure from 1st April 2012.

 

We believe the numbers speak for themselves.