CIRD81650 - R&D tax relief: conditions to be satisfied: subsidies (SME scheme only)
CTA09/Ss1052(6), 1053(5) and 1138 - SME scheme only
R&D tax reliefs under the SME scheme are not available for expenditure that is subsidised. If the only reason that the expenditure does not qualify for SME scheme R&D tax relief is that the expenditure is subsidised, then, for accounting periods beginning on or after 9 April 2003, an SME can make a claim for relief under the large company scheme (CIRD89000) or since 1 April 2013, for the RDEC where all conditions are met.
Where a project has received any funding which is a notified State Aid (CIRD81670) then no expenditure on that project can qualify for the R&D tax relief under the SME scheme. The legislation defining “subsidised expenditure” provides that if a grant or subsidy is received which is not notified State Aid, the expenditure is subsidised to the extent that it does not exceed the subsidy. This may result in the expenditure qualifying for R&D tax relief partly under the SME scheme and partly under the large company scheme or RDEC.
A notified State Aid, grant, subsidy or payment that is not provided for particular expenditure should be allocated according to the underlying facts.
The legislation separately provides that expenditure is also subsidised to the extent that it has been met, directly or indirectly by any other person. So expenditure may be “subsidised expenditure” even though the payments are not, for example, a grant or subsidy paid by a public body.
HMRC recognises the wide scope of the legislation and provided the following view to a meeting of the Research & Development Consultative Committee in October 2013:
NS agreed that the guidance required further review to give an indication of where the boundary lay between subsidised and non-subsidised expenditure. The meaning of ‘subsidised’ (CTA 2009 S1138) referred to expenditure being met directly or indirectly which was not particularly helpful as all expenditure is met indirectly in some way or other.
Currently HMRC took the view that there needed to be a clear and direct link between the payment received and the qualifying expenditure.
Link to the public document which, incorrectly, refers to s1308.
What is considered to be a “clear and direct link” will depend on the facts in each case. However: -
• Payment received for undertaking a contract will be considered to meet expenditure incurred in undertaking that contract.
• Where a company carries out R&D on its own account and subsequently sells goods or services developed as a result of that R&D, receipts from those sales will not be considered to meet the expenditure incurred on the R&D.
• Where a company carries out R&D on its own account, receipts from the sale of goods or services which existed prior to the R&D being undertaken will not be considered to meet expenditure incurred on the R&D.
• Where a company obtains finance on commercial terms this will not be considered to meet the company’s expenditure.
COVID-19 Government support
See CIRD 83200 for information about the Coronavirus Job Rentention Scheme and the Coronavirus Statutory Sick Pay Rebate Schemes
- Coronavirus Business Interruption Loan Scheme
- Coronavirus Large Business Loan Scheme
- Bounce Back Loans
The three schemes shown above are all notified State aid, meaning that S1138(1)(a) CTA 2009 could potentially prevent a claim for SME relief. HMRC would only expect this to happen where the loan relates specifically to the company’s expenditure incurred on an R&D project rather than providing general support for the company;
- Future Fund
The loans provided through the Future Fund scheme are not notified State aid. They are not caught by s1138 CTA 2009 and need not be considered when looking at the State aid cumulation rules.
- Recovery Loan Scheme
The Recovery Loan Scheme, was announced on 3 March 2021. In most situations HMRC do not consider that the receipt of these loans will have any effect on subsequent claims for Research and Development Expenditure Credit or for subsequent claims for the Small and Medium Size Enterprise Research and Development Relief. However, because the scheme is a notified State Aid, if a company’s R&D activities fall within the Northern Ireland Protocol there is a possibility that s1138(1)(a) will be in point. Where a company’s R&D activities fall within the Northern Ireland Protocol and the loan was obtained for, or used to fund, any element of those activities, a claim for Small and Medium Size Enterprise Research and Development Relief cannot be made because the expenditure has been subsidised and s1138(1)(a) applies.