CIRD81670 - R&D tax relief: conditions to be satisfied: no notified state aid

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.

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

The SME scheme for R&D tax relief is sufficiently generous that it counts as a notifiable State Aid, and for that reason we have to restrict its availability to companies not in receipt of other notifiable State Aids for the R&D project in question. That blanket rule is to avoid the danger of exceeding the State Aid ceilings while keeping the SME R&D regime simple to operate.

Where an R&D project has received funding which is a notified State aid then no expenditure by the company on that project can qualify for the R&D SME relief (which is itself a notified state aid). This rule does not apply only to funding received to cover wages and consumable items. Any funding whatsoever, that is a notified state aid received for any aspect of the R&D project at any time, will prevent any R&D tax relief under the small company regime. A notified State aid is a State aid that has been notified to, and approved by, the EC.

Notified state aids are usually government funded grants such as the Grant for Research and Development (which replaced the SMART award in June 2003). But not all government grants are notified State aids - for example, some funding under the SMART label was not a notified State aid (e.g. grants for feasibility studies and micro-enterprise awards).

If clarification of the status of a grant is needed, the body that has provided or arranged the funds should be able to help. Where the company has benefited from a state aid for a project which disbars it from claiming the R&D relief under the SME scheme it can, for expenditure incurred in accounting periods beginning on or after 9 April 2003, claim under the large company scheme for that project ( CIRD89000). However, prior to this date such expenditure was excluded.

If a company has received a grant or other form of notified state aid and then decides to repay it in order to claim R&D relief, it would still be barred from claiming relief for the project funded by the state aid. The legislative test in FA00/SCH20/PARA8 (1)(a) is whether a notified state aid is, or has been, obtained.