HMRC internal manual

Corporate Intangibles Research and Development Manual

CIRD81670 - R&D tax relief: conditions to be satisfied: effect of notified state aid (SME scheme only)

SME scheme only

As a signatory of the European Community Treaty, the Government is subject to the European rules on State Aid. The EC has considerable powers to monitor, control and restrict the level of aid given by all Member States to their industries. But broadly speaking the Commission may intervene when they consider that a measure is provided through State Resources, favours certain undertakings or the production of certain goods, relates to an activity that is tradable between member states, and the measure distorts, or has the power to distort competition.

There are certain circumstances where the strict rules are modified, and one of these is related to the promotion of R&D. But there remain ceilings as to how much State Aid can be provided, and there is a different treatment for SMEs than there is for large companies. This is reflected in the fact that we have two different regimes for these sorts of entities.

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Effect of notified State Aid rules on the SME R&D tax relief

A notified State aid is a State aid that has been notified to, and approved by, the European Commission. Notified State aids include:


  • Government funded grants schemes (e.g. the Smart grant (previously the Grant for Research and Development)). Not all government grants are necessarily State aids, and funding under some schemes may or may not be State aid depending on the circumstances. Given the number of different schemes available and the fact that schemes and their names change, HMRC is not able to give specific guidance on which grants are State aids. If your company receives, or may receive, a grant you should consult the scheme/ grant provider about this.


The SME R&D tax relief scheme

If a company is in receipt of a notifiable State aid for an R&D project it cannot claim any other State aids. This is to avoid the company receiving more State Aid than is permitted under the State Aid cumulation rules.

If excess aid were received this could be ‘clawed back’ by the EU, and the company could also be charged interest on the aid received.

A company that has received a grant or other form of support which is notified state aid for a project cannot subsequently repay this support in order to claim R&D relief. See the legislative test in CTA09/S1138 as to whether a notified state aid is, or has been, obtained.

General measures that are not restricted to a specific group are not notified State aid. These include:

  • the Large company R&D tax credit scheme (for work until 31 March 2016, when this scheme will be withdrawn), and
  • the Research and Development Expenditure Credit Scheme (RDEC) (for work undertaken from 1 April 2013)

A company in receipt of a notified aid can claim the large company tax relief or the RDEC.

In addition, companies can also claim for qualifying R&D costs funded by the grant. This is because there is no provision under the large company R&D tax credits scheme preventing subsidised expenditure from qualifying for R&D tax relief – see CIRD89000.

De Minimis Aid

If a company is in receipt of aid of less than €200,000 over 3 years, this aid may qualify as De Minimis aid under the De Minimis Regulation. This aid does not require prior notification or approval from the Commission as small amounts of aid are considered unlikely to distort competition. Awarding authorities should tell companies when they are receiving de minimis aid and the company in receipt of de minimis aid must keep records for 10 years of the total amount of aid received and what they used the de minimis aid for.

  • A company cannot claim SME R&D tax credit for costs within a project that are funded by De Minimis aid.
  • A company can claim SME relief or payable credit for costs within the project not funded by De Minimis aid.

This means a company cannot top up SME R&D tax credits with de minimis aid, though if they are already in receipt of de minimis aid they can cumulate it with other aid as long as the aid intensity as set out in the State aid rules, for the aid scheme they are claiming under, isn’t breached. This is typically 50% of project costs. This is to prevent companies receiving more than the amount of aid permitted for a project, or in EU terminology, to exceed the maximum permitted aid intensity. This rule applies only to the project costs, not on a company basis. A link to the latest EU Aid intensity table is below

EU Funded programmes

The EU provides grants for research and innovation that are not notified State aid as they are not channelled through the UK Government, for example:

  • ‘Horizon 2020’
  • Framework Programme.

However structural funds such as ERDF (European Regional Development Fund) are controlled by the UK Government and therefore are State aid.

SMEs in receipt of direct EU funding can therefore claim relief under the SME R&D tax credits scheme for their own expenditure on the project including the payable tax credit if appropriate. In addition, relief on the EU grant can be claimed under the Large Company scheme and the RDEC.

In order to qualify as an SME company (and therefore be eligible for the SME R&D Credit Scheme), a company has to have fewer than 500 employees and either an annual turnover not exceeding €100 million; or a balance sheet not exceeding €86 million.

Sources of further information

For further information about some of the basics of State Aid see the guidance at, including the linked guidance at State Aid: the basics.