Companies who receive funding by way of grants and loans have often heard the term State aid but do not always fully understand what the different types of State aid are, how they interact and what effect they may have on the tax relief which a UK company can obtain, particularly if the company is making R&D relief claims. This has been further complicated by the fact that many of the Coronavirus loans made available to companies during 2020 are classed as State aid, which can have an effect on companies’ R&D relief claims in their 2020 and 2021 tax returns.
Types of State aid
State aid funding is classed as either notified State aid or de minimis aid. Grants are usually treated as notified State aid unless it is actually specified in the documentation that they are de minimis aid.
Notified State aid
Government funding often qualifies as notified State aid, although not all Government schemes fall under that heading, so it is not always easy to tell. A notified State aid is a State aid which has been notified to, and approved by, the European Commission (EC). There are limits on the amount of State aid which organisations can receive.
R&D relief under the SME scheme counts as notified State aid.
De minimis aid
As noted above, there are limits on the amount of State aid which organisations can receive but the EC decided that small amounts of aid would not distort competition, so it introduced a ‘de minimis’ level, below which aid does not need to be notified. However, there is a limit of the amount of de minimis funding which companies can receive: the EC has imposed a ceiling of 200k Euros for all de minimis aid provided to any one organisation over a 3-year fiscal period.
Companies making SME R&D relief claims cannot claim SME R&D tax credit for any project costs funded by de minimis aid.
UK eligibility for State aid
After the UK’s departure from the EU, the EU State aid rules continued to apply to the UK throughout 2020 and this arrangement came to an end on 31 December 2020. A similar set of rules is now included in the TCA (Trade and Cooperation Agreement) between the EU and the UK.
UK companies still need to be aware of the State aid rules when dealing with claims in their 2020 and 2021 tax returns.
The Temporary Framework
On 19 March 2020 the EC adopted a new State aid Temporary Framework to support the EU economies in the context of the coronavirus outbreak. Amendments were made to the framework rules at various stages during 2020 and the Temporary Framework was set to expire on 30 June 2021.
The UK adopted the Temporary Framework rules, so UK companies need to be aware of the related rules. Under the Temporary Framework, most undertakings have an overall limit of 800k Euros (circa £711,200) on the State aid which they can receive by way of grants, loans etc.
Coronavirus Loans and Grants
The UK Government’s Coronavirus Loan Schemes are now closed to new applicants but it is still important for businesses to understand how these schemes are treated for State aid purposes and how they interact with other reliefs. Government guarantees and interest payments under CBILS (Coronavirus Business Interruption Loan Scheme), CLBILS (Coronavirus Large Business Interruption Loan Scheme) and BBLS (Bounce Back Loan Scheme) all count towards the Temporary Framework limit, as do various Coronavirus-related grants. However, the ESFA (Education and Skills Funding Agency) confirmed that the Temporary Framework was not applicable to the ESF Programme.
Coronavirus loans often have a requirement whereby businesses need to be able to confirm that they have not received more than £711,200 (=800k Euros) State aid under the Temporary Framework, ie this requirement applies specifically to the receipt of coronavirus-related funding. As part of the application process, applicants were required to declare that their business, together with all partner enterprises or linked enterprises of the business or under common control, had not breached State aid limits. This related mainly to group companies but could also apply where there was “dominant influence”, so connected non-group companies also had to be taken into account.
If a company receives a loan such as a BBLS loan under the Coronavirus funding arrangements, the Government pays the interest in the first year, so the first year of the loan is the ‘BBLS State aid period’, even though the loan itself will continue beyond that point. After the first year, the company pays the interest itself.
Interaction with R&D relief
There are two types of R&D relief claim:
SME - The Small and Medium Enterprises scheme
RDEC (R&D Expenditure Credit) - The Large Company scheme (also used by some smaller companies)
SME scheme R&D relief is State aid and counts as notified State aid, so it is therefore not de minimis aid and does not count towards the de minimis limit (200k Euros over 3 years) mentioned above.
RDEC: If R&D work is funded by a grant or subsidy, then the R&D relief claim has to be under RDEC instead of SME. (There are cases where the claim can be split between RDEC for the funded element and SME for the non-funded element, but in many cases any funding at all makes it totally RDEC). RDEC is not classed as State aid.
If a company receives a notifiable State aid (either a grant or some other form of support which is notified State aid) for an R&D project, it cannot claim any other State aids.
For instance, if a company receives a BBLS loan (a notified State aid) and uses some of its BBLS monies for expenditure relating to a qualifying R&D project, it cannot therefore claim SME relief (another notified State aid) for the same R&D relief project. If a company has a R&D project which is eligible for a SME claim, it needs to make sure that BBLS monies are not spent on anything related to that project. It is important for the R&D relief claim to remain untainted by any association with BBLS funding during the BBLS State aid period, so that there is no question of the R&D relief claim having to be made under the less favourable RDEC scheme, instead of SME. A company’s R&D expenditure is treated as subsidised (and therefore ineligible for SME relief) if the company receives any other notified State aid attributable to that R&D.
This can be a complex area to navigate, if you would have any questions, or would like clarification on how the rules affect you, please contact us for further advice.