Research and Development (R&D) tax relief is a valuable incentive provided by the UK government to encourage innovation and technological advancement; however, understanding the rules and regulations surrounding subsidised expenditure can be challenging. In this article, we will delve into the intricacies of subsidised expenditure rules relating to R&D tax relief claims in the UK.
What is Subsidised Expenditure?
Subsidised expenditure refers to any funding or support received from external sources, such as grants, subsidies or state aid, which directly or indirectly contribute to the R&D activities of a company. In the context of R&D tax relief, the presence of subsidised expenditure can impact the amount of relief a company can claim. As a general rule, if the R&D project is subsidised, the claimant company will need to utilise the less generous RDEC system, either wholly or in part, when making a claim.
The Basic Rule
According to the guidelines set by HMRC, if a project has received subsidised funding, the company must subtract the value of that funding from the total eligible R&D costs before calculating the SME tax relief claim. The funded portion must then be claimed using the RDEC scheme. This ensures that the tax relief only applies to the portion of expenditure that has not been covered by the subsidy. R&D work that is being undertaken on behalf of a third party (i.e., you are the subcontractor) would also normally be considered as subsidised expenditure, but the key detail should be included in the contract or agreement between the two parties.
Where a project has received funding that meets the definition of “Notified State Aid” (such as an Innovate UK Grant), none of the costs associated with that specific project can be claimed as part of an SME R&D tax relief claims for the entirety of the project. The common misunderstanding is that this requirement only relates to the year(s) in which the grant was received.
Complying with State Aid Rules
Apart from HMRC guidelines, it is crucial to consider State Aid rules when dealing with subsidised expenditure. State Aid rules are imposed by the European Commission and aim to ensure fair competition within the European Union; the UK has adopted and continued these rules post Brexit. Companies claiming R&D tax relief must ensure that their activities comply with these rules to avoid potential penalties or the need to repay any incorrectly received aid.
Calculating the Subtraction
To calculate the amount that needs to be subtracted, the company should identify the specific costs covered by the subsidy. These costs include both direct and indirect expenditure associated with the R&D project. It is essential to note that only the qualifying costs that fall within the scope of R&D tax relief should be considered.
There are three main approaches for calculating the deduction of subsidised expenditure:
- Notional deduction method: Under this method, the company determines the proportion of subsidised expenditure relative to the total R&D project cost. This proportion is then used to reduce the eligible expenditure claimed for R&D tax relief.
- Actual deduction method: Alternatively, the company can choose to deduct the actual amount of subsidy received from the eligible R&D costs. This approach requires accurate records and documentation to substantiate the calculations.
- Notified State Aid deduction: As previously mentioned, when a project has received a subsidy that meets the definition of notified state aid, none of the expenditure (self-funded or grant funded) can be included in an SME R&D tax relied claim.
- Documentation: Maintaining accurate records of the subsidy received, its purpose and how it was used within the R&D project is crucial. Clear documentation will facilitate the calculation of the subsidised expenditure deduction and help in complying with HMRC’s requirements.
- Professional advice: Given the complexities involved in calculating subsidised expenditure, it is advisable to seek professional advice from tax specialists or R&D tax consultants. They can assist in ensuring accurate calculations and compliance with the relevant regulations.
Navigating the subsidised expenditure rules for R&D tax relief claims in the UK can be challenging, but understanding and complying with these regulations are essential to maximizing the benefits of the incentive. By properly accounting for subsidised expenditure and deducting it from eligible costs, companies can ensure they are claiming R&D tax relief correctly while also abiding by the State Aid rules. Consulting with experts in the field will provide valuable guidance and ensure compliance, enabling companies to fully leverage the benefits of R&D tax relief and foster innovation in the UK.
With the introduction of the new additional information form, the identification of project-specific expenditure as it relates to both self-funded and grant funded expenditure is even more important than in previous years.