R&D Tax Credits for Funded Projects

R&D Tax Credit Claims for Funded Projects

Background

If any of your R&D Tax Credit Projects were funded either by other companies or by grants, it is very important to understand the nature of the funding and what effect this has upon your R&D Tax Credit Claim.
Essentially the nature of the funding can determine:
  1. Whether an R&D claim will be possible
  2. If so, which regime/s the costs should be claimed under

R&D Projects Funded by an SME

Unfortunately, where a Small Company directly funds another company to undertake R&D, regardless of recipient companies size, the costs cannot be included under any of the three R&D Tax Credit Regimes.
However, this should not be confused with the Small Company purchasing a product from you, which would not be classified as 'funded R&D' (see below).

R&D Funded by a Large Company or in Receipt of Grants

Where an R&D project has been funded by a large company (or has been in receipt of grants), it is possible to claim the qualifying expenditure under the RDEC regime.
  • For large company claimants, this means that there is no effect to their claims (that are revenue in nature for tax purposes), as these would only be claimable under the RDEC regime anyway.
  • For SME company claimants, that have received funding for their projects, the qualifying expenditure needs to be assigned or apportioned to the appropriate R&D regime. This will be RDEC for funded projects, and the SME regime for internally funded projects. Sometimes there can even be a mix within one of your projects, as the scope of a project for R&D purposes is not necessarily the same as the scope of your project for business purposes.

Is the Purchasing Company Paying for a Product or the Undertaking of R&D

Distinguishing between funded and purchased R&D is an important determination for many companies and a crucial determination for most service companies.

Funded R&D

If a third-party pays your company to solve a specific problem (which is eligible as R&D for tax purposes), the advance and uncertainty are already apparent and you have the scientific or technological expertise to try resolve the uncertainty, then this would typically indicate that the R&D was funded.

Purchased R&D

If you are being paid for a product that was created as a result of R&D, then this probably is not funded R&D and so the costs would be treated as per internally funded costs.
For example, if a company gets paid £50,000 to deliver a finance system to another company. In delivering this system, the company had to undertake R&D to overcome security and persistence uncertainties, then this would typically be seen as a purchase of a product, rather than the funding of an R&D project.

How is This Complexity Handled by The RD Relief Software

This complexity is automatically handed within the RD Relief software, which automatically assigns qualifying expenditure to the correct regime (or combination of regimes), depending upon your selections. If you want to find out more information, then please get in touch

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