Research and Development – is it always good to receive a ‘grant’?

12th Dec 2011

When a company undertakes R&D, it may consider applying for a grant to assist with its costs. However, care should be taken when deciding whether to apply because the tax relief claim is affected by the receipt of a grant, and it may be better for your company to claim higher tax relief than to claim a grant.

 
There are two schemes for claiming tax relief:
·       The Small or Medium-sized Enterprise (SME) Scheme
·       The Large Company Scheme
The SME Scheme
This scheme has very high rates of relief. From 1 April 2011, the tax relief on allowable R&D costs is 200 per cent - that is, for each £100 of qualifying costs, your company could have the income on which Corporation Tax is paid reduced by an additional £100 on top of the £100 spent. It also includes a payable credit in some circumstances. The proposal is for the relief to be increased to 225% on 1 April 2011, so the relief will become even more valuable.
 
You can only claim under the scheme for SMEs if your company meets the definition of a SME for R&D Relief – most companies will be sufficiently ‘small’ to qualify.
The Large Company Scheme
If your company is not small or medium-sized, then you can only claim under the Large Company Scheme.
Tax relief on allowable R&D costs under the large company scheme is 130 per cent.
 
Grants received
 
If your company has received a grant towards the R&D project costs it will be eligible to claim only under the large company scheme, and therefore your relief will be at 130% instead of 200% or 225%. This is despite the fact that your company may be small or medium-sized. Great care therefore needs to be taken when deciding whether to apply for a grant; it may be that the ability to claim under the SME scheme is greater than the benefit of the grant plus only being able to claim under the large company scheme.

Author: Emma Glover (emma.glover@rowlandsaccountants.co.uk)

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