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The interaction between Research and Development and State Aid

What is state Aid

State Aid is “any advantage granted by public authorities through state resources on a selective basis to any organisations that could potentially distort competition and trade in the European Union (EU)”.

An “advantage” is defined as “anything which an undertaking (an organisation engaged in economic activity) could not get on the open market”. 

State Aid includes the following:

  • Loans
  • Grants
  • Tax breaks, including enhanced capital allowances
  • The use or sale of a state asset for free or at less than market price.

State Aid can be provided to support a wide variety of activities including research and development, environmental protection and aid for small to medium sized businesses.

The effect of state aid

The European Community has significant power which enables it to control, monitor and restrict the level of aid provided by each Member State.    These powers are in place to allow the Commission to intervene when they believe a measure favours certain undertakings or goods or services.  The UK government must therefore follow the guidance set by the EC regarding State Aid.

There are certain circumstances where these rules are modified, including Research & Development (R&D), however, as previously noted there are restrictions on how much State Aid can be provided and these restrictions vary between both the SME and large companies’ regimes.

Notified State Aid

A “Notified State Aid” is a State Aid that has been notified to, and approved by, the European Commission.  Examples of Notified State Aid can include:

  1. SME R&D regime
  2. Employment allowance
  3. Coronavirus Business Interruption Loan Scheme (CBILS)
  4. Small Business Grants Fund (SBGF)
  5. Retail, Hospitality, and Leisure Grant Fund (RHLGF)

In any case we would recommend confirming with the scheme or grant provider to confirm whether the aid received qualifies as Notified State Aid.

General measures that are not restricted to a specific group are not Notified State Aid and include the Research and Development Expenditure Credit Scheme (RDEC) regime.  Given the RDEC scheme is not classed as a Notified State Aid an entity is permitted to claim the RDEC in addition to Notified State Aid.

De-Minimis Aid

If an entity receives State Aid of less than €200,000 over the course of three years this may qualify as “De-Minimis Aid”.  This does not require prior notification or approval as these ‘small’ amounts are considered unlikely to distort competition (or grant an advantage).  However, a company cannot claim SME R&D relief for projects that are funded by De-Minimis Aid.

The effect of State Aid on the SME R&D regime

Entities that perhaps previously met the criteria for the SME R&D regime but now receive grant funding by way of Notified State Aid will not be permitted to claim under the SME R&D regime as this itself is defined as State Aid.   Depending on the scenario it may be better for the company to not receive the grant funding in the first place so that it can claim relief under the SME R&D regime or to receive the grant funding but to claim under the RDEC regime (known as the “above the line” method) against qualifying expenditure.  It should be noted however, that it is not possible for the grant to be subsequently repaid in order to claim SME R&D relief.

If however, the entity were to receive a “Non-Notified State Aid” funding grant then the relief works in a slightly different way.  The entity is permitted to claim R&D relief under the SME regime as it would normally but the grant would first need to be off-set against the qualifying expenditure.  The expenditure that is then covered by the grant would then qualify for R&D relief under the RDEC regime.

The effect of Coronavirus on SME R&D refunds

At present HMRC are sending R&D refunds out within 6 weeks of receipt of the claim, however there is a possibility that the refund you receive may be lower than what you expect.

Firstly, if you have any outstanding debts with HMRC these will be repaid and offset against any refund amount due.  So if you have agreed a time to pay arrangement with HMRC for taxes, HMRC will use an R&D refund to offset any amounts included in the time to pay arrangement as they are by default of being included in the agreement, overdue..

However if you chose not to pay your VAT liability because of the VAT deferment regime, this does not constitute an overdue HMRC liability and so HMRC will not use the R&D regime to pay the amounts not paid.

If you would like to find out more about Research and Development claims or the implications of State Aid on R&D claims please contact a member of our Corporate Tax team who will be more than willing to help 01494 552100

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing (19 May 2020).