Are R&D tax credits state aid?

Research and Development (R&D) tax credits are a valuable incentive for businesses investing in innovation. However, many business owners often wonder whether these credits are considered state aid. This article aims to clarify this important question and provide a comprehensive understanding of how R&D tax credits interact with state aid regulations.

Are R&D Tax Credits Classed as Notified State Aid?

State aid refers to various forms of assistance given by the government to businesses which could potentially distort competition and trade within the European Union (EU). Notified state aid is aid that must be approved by the European Commission (EC) before it can be granted. R&D tax credits can indeed be considered as state aid, but the classification depends on the scheme under which they are claimed.

For smaller companies

For smaller companies, R&D tax credits can be particularly beneficial. Small and Medium-sized Enterprises (SMEs) can claim under the SME R&D tax relief scheme, which is more advantageous compared to the scheme available for larger companies. However, this scheme is classified as notified state aid, meaning it must comply with the EU’s state aid rules.

For larger companies

Larger companies typically claim R&D tax credits under the Research and Development Expenditure Credit (RDEC) scheme. Unlike the SME scheme, RDEC is not classified as notified state aid. This distinction is crucial for companies receiving other forms of state aid, as it influences how different aids can be combined.

SME R&D Tax Relief Scheme

The SME R&D tax relief scheme allows smaller companies to claim a higher rate of relief. SMEs can claim up to 230% of their qualifying R&D costs, reducing their corporation tax significantly or providing a payable credit. However, because this scheme is considered notified state aid, businesses need to be cautious when combining it with other state aids.

For instance, if a project has already received a grant considered as state aid, the same project might not qualify for the SME R&D tax relief scheme. Instead, the business may need to claim under the less advantageous RDEC scheme.

RDEC Tax Relief Scheme

The RDEC scheme, available to both large companies and SMEs unable to claim under the SME scheme, offers a credit of 13% of qualifying R&D expenditure. Although the rate is lower than that of the SME scheme, RDEC’s classification as non-notified state aid provides more flexibility. Companies can combine RDEC with other state aids without breaching EU rules, making it a viable option for projects that have already received funding from other sources.

The impact of notified State Aid on the R&D claim process

Understanding whether R&D tax credits are classified as notified state aid is essential for optimising your claims and ensuring compliance. For SMEs, the implication is clear: receiving other forms of state aid may limit or exclude the possibility of claiming SME R&D tax relief for the same project. In such cases, businesses should assess the total benefit of combining different aids versus claiming under the RDEC scheme.

Larger companies, on the other hand, benefit from the RDEC scheme’s flexibility, allowing them to receive R&D tax credits alongside other state aid without regulatory issues. This advantage highlights the importance of strategic planning in funding R&D projects to maximize available incentives.

In conclusion, while R&D tax credits can be considered state aid, the specific classification depends on the scheme used. SMEs need to be particularly mindful of the implications of notified state aid when planning their claims, whereas larger companies can leverage the RDEC scheme’s flexibility. By understanding these distinctions, businesses can better navigate the complexities of state aid regulations and optimise their R&D tax credit claims.

Why choose us?

At Kene, we specialise in navigating the complexities of R&D tax credit accounting with unparalleled expertise. Our team, composed of chartered tax advisers and industry specialists, guarantees precise and compliant reporting for both RDEC and SME schemes. We stay current with HMRC regulations and industry best practices, providing tailored advice to maximise your benefits while minimising risks.

Our client-focused approach ensures we understand your unique business needs, delivering personalised solutions that go beyond standard accounting. With a proven track record of successful claims and a commitment to excellence, we help you unlock the full potential of your R&D investments. Choose Kene for peace of mind in claiming R&D tax credits.

Book your free consultation here.

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