CIRD81670 - R&D tax relief: conditions to be satisfied: effect of notified State aid

As a Member State of the EU, the UK was subject to the EU's rules on State aid. In limited circumstances these rules continue to apply and the legislation for the SME R&D tax relief scheme, where it applies, still reflects these obligations.  

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

A notified State aid is defined in the legislation as a State aid that has been notified to, and approved by, the European Commission. Such notified State aids could include Government funded grant schemes although not all government grants are necessarily State aids and funding under some schemes might or might not be State aid depending on the circumstances.

Following the UK's departure from the EU, Government grants will only be State aid in very limited 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.

This guidance sets out the general principles that currently apply.

For enterprises in Great Britain (GB) a subsidy will not generally be considered as a State aid unless the subsidy triggers conditions in Article 10 of the Windsor Framework (“A10WF”). This will only possibly occur if all of the following are true:

  • The enterprise has a trade in manufacturing goods or is in the electricity market
  • The subsidy is over £10m, or £3m for an SME
  • The enterprise has over 10% of the relevant Northern Ireland (NI) goods or electricity market
  • The economic benefit of the subsidy is passed from GB to NI.

A subsidy awarded to an enterprise in NI will be State aid if it has a material effect on NI-EU trade in goods. Virtually the only instances where this will be the case will be where a subsidy is awarded directly to a company with a NI Registered Office which has either a trade in goods or relevant activities in relation to electricity.

The SME R&D tax relief scheme 

If a company is in receipt of a notified State aid for an R&D project it cannot also claim SME R&D relief for that project. This is to avoid the company receiving more State aid than is permitted under the State aid cumulation rules. 

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.  

General measures that are not restricted to a specific group are not notified State aid. This includes the Research and Development Expenditure Credit Scheme (RDEC). 

A company in receipt of a notified State aid for a project can claim RDEC for that project.

In addition, companies can also claim RDEC for qualifying R&D costs funded by a grant. 

General Block Exemption Regulations (GBER) 

HMRC considers all aid subject to GBER to be treated as notified State aid for the purposes of s1138 CTA 2009. 

This is because although Aid which fulfils the conditions of the State aid General Block Exemption is exempted from the requirement of prior notification and European Commission (EC) approval, providers of such aid must still register the award of aid, or the scheme under which it operates, with the EC.  

De Minimis aid 

Companies may also receive small amounts of State aid under the De Minimis Regulation. Awarding authorities tell companies when they are receiving de minimis aid and they also tell them the amount of de minimis aid they are awarding. 

  • 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.

EU Funded programmes 

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

  • ‘Horizon 2020’
  • Framework Programme.

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

SMEs in receipt of direct EU funding could 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.