R&D Grants or R&D Tax Credits – which are better?2nd October 2017
That’s a question often asked by innovators and the answer is…. it depends!
It depends on whether you’ve already started your R&D project or not. It depends on whether you are really pushing the boundaries of science or technology and creating new IP – or just making modest enhancements to products, processes and services. It depends on how risky your project is and whether or not you have, or can obtain, the funds to carry it out.
So what are the differences?
R&D grants are forward looking – aimed at future R&D projects you plan to do. Any past expenditure is irrelevant. They are targeted at SMEs making step-change advances in science and technology. Such projects are often highly risky with very uncertain outcomes and can be really difficult to finance. That’s why R&D grants contribute between 25% and 75% of the costs of an R&D project – usually paid in stages throughout the R&D project. Applicants contribute matched funding from their own resources to fully fund the project.
R&D grant funding is limited and competition for R&D grants is really intense. A compelling application setting out a well-planned R&D project and a business case is crucial to success.
By contrast, R&D tax credits are retrospective – enabling you to recover around 25% of your eligible R&D expenditure as a tax relief. HMRC’s interpretation of R&D is much less stringent, so even modest enhancements to existing products and services are covered, provided there is uncertainty in an outcome. There is no application competition but it pays to have expert help to prepare an application even if only to optimise your claim.
Note that if you do successfully win an R&D grant for a project – don’t expect to also claim R&D tax credits for the same project! That’s because both are a form of state aid and you can’t have both! However, nothing stops you from claiming R&D tax credits for other projects – or from using money saved via R&D tax credits on one project as matched funding for an R&D grant on another project.
The good news is that both R&D grants and R&D tax credits encourage SMEs to invest in R&D to create new products and services. This is to stimulate economic growth, new jobs and overall prosperity. And that’s got to be good for all of us!