Business grants can provide startups and small businesses with fantastic opportunities to invest in innovation, but how do they impact R&D tax relief?
Before beginning a research and development project, many businesses search for innovative business grants in order to maximise financial opportunities – but how can businesses in the UK protect their future R&D claims while seeking other financial incentives?
Let’s explore with an in depth look into business grants and their interaction with R&D tax relief.
How Business Grants Support Innovation
Innovation is historically associated with financial pressure, which can be off putting for many businesses. But for those dedicated few that believe in their cutting edge missions, business grants can provide adequate financial relief throughout each phase of innovation.
Business grants may provide benefits such as:
- Risk mitigation
- No payback requirement
By strategically allocating business grants to innovative projects, businesses are able to facilitate new ideas without risking an exorbitant amount of capital.
Co-funding Business Grants
For innovative businesses looking to further offset costs, the strategic use of co-funding business grants can provide extensive opportunities.
Designed to support innovation, co-funding business grants are financial programs wherein the funding body provides partial funding for specific projects, with the assurance that the business itself contributes a percentage of the project’s cost.
Co-funding business grants in the UK typically fall in these three categories:
- Innovation loans
Co-funding grants that present in the form of loans, provide businesses with low interest funds to invest in research and development. For example, the Innovation Loan from Innovate UK requires businesses to fund part of their project, while the loan covers the remaining expenses - Matching grants
The more traditional co-funding business grants require that businesses match the allocated funding exactly. For example, if the grant is providing 50% of the project funding, the business must provide the other 50% - Collaborative grants
When businesses engage in innovative projects alongside other businesses or research organisations, co-funding grants may be implemented to cover the expenses incurred during collaborative projects. For example, some Horizon Europe funding requires multiple stakeholders to invest in collaborative projects
Startup Business Grants for Research and Development
As some of the most ingenious businesses are startups, they are presented with additional funding opportunities that enhance their research and development capabilities. Some of these startup business grants include:
- Innovate UK smart grants
Available for innovative research and development projects across all industries, and the amount of funding allocated to a project is dependent on the scope of innovation, along with the potential impact - Eurostars programme
Encourages collaborative research and development, as it provides funding for startups that partner with organisations throughout participating countries in order to develop products, services and new processes - Biomedical Catalyst
For startups investing in innovative healthcare solutions, this funding supports research and development projects from the inception through to early stage clinical trials
Startups looking to receive funding from these grants must be careful to review eligibility criteria ahead of application, in order to ensure that both the business and the project qualify for funding.
Additional Small Business Grants and Funding for Research and Development
For businesses that meet the European Community definition of an SME – including startups – additional funding may be available for innovative projects, especially if they seek a scientific or technological advancement. For example:
About R&D Tax Credits
Designed to encourage UK businesses to invest in research and development efforts, R&D tax credits provide financial relief for projects that meet HMRC’s qualifying criteria.
Initially, these criteria state that a qualifying project is one that aims to overcome an industry uncertainty that cannot be otherwise solved by an expert in the field, through research and development that aims to make an advancement in science or technology. Ultimately, the project should aim to produce a new or improved:
- Product
- Service
- Software
- Process
Businesses looking to make an R&D tax credit claim must also ensure that they are liable to corporation tax in the UK, and that the advancement is not in one of the following areas:
- The arts
- Humanities
- Social sciences (including economics)
How Business Grants Impact R&D Tax Credit Claims
When it comes to claiming R&D tax credits alongside grant contributions, it’s important to consider the accounting period under which the research and development project took place.
If a business received a grant for a project during an accounting period starting before April 1 2024, the grant covered costs must be treated as subsidised expenditure. These costs will fall under the RDEC scheme, while the remainder of your eligible expenditure will be treated as usual.
Businesses that received a grant for a project during an accounting period beginning on or after April 1st 2024, will find that their grant funding doesn’t impact their R&D tax credit claim. This is because the claim will fall under HMRC’s new merged scheme.
This ensures that all businesses receiving de minimis aid can benefit from R&D tax credit relief.
How to Optimise Business Grants for R&D Tax Relief
The process of optimising business grants so that you may maximise R&D tax credits, requires strategic planning that ensures your business is continuously aligned with various eligibility criteria.
The steps to optimising business grants for R&D tax relief are as follows:
- Review various eligibility criteria
Keep track of the eligibility criteria for grants, loans and R&D tax relief in order to optimise project spending - Strategically allocate funds
Separate grant funding from business investment into the project in order to track non subsidised costs - Plan project timeline
Enhance the effectiveness of R&D tax credits against subsidised costs by considering the timing of grants and their impact on each project phase - Keep meticulous financial records
For maximum efficiency, keep project financial records separate from everyday business records, and remember to show how the grant was used throughout the documentation process - Consult with R&D tax credit advisors
Specialists that understand the intricate nature of grants and R&D tax relief can provide additional support that can enhance your overall claim
Documenting Eligible Expenditure
One of the most significant parts of an R&D tax credit claim, is the clear presentation of financial records that confirm your eligible expenditure. In order to understand how to document these financial records for an R&D tax relief claim, it’s important to understand that the eligible expenditure includes:
- Staff costs (including PAYE, NIC and pension contributions)
- Software used in research and development
- Test stage prototype costs
- Consumable items (including materials and some utilities)
To accurately document all of these costs, we recommend that you frequently update financial records with the following information:
- Employee time sheets or allocated hours for R&D related work
- Detailed subcontractor invoices
- Breakdown of R&D related expenses (separate from business expenses)
- Supplier invoices detailing R&D related materials and services
- Grant allocation showing where funds were allocated
Alongside these documents, you can expect to present your corporation tax form (CT600).
In conclusion, business grants and R&D tax relief can have a powerful cohesive effect that can reduce the financial strain of research and development. This allows businesses to expand their innovative prospects, bolster their market competitiveness, and further invest in their own sustainable growth.
And with the latest changes to R&D tax credit legislation, the claims process is about to become a whole lot simpler.
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