Government Covid-19 funding: It pays to check the small print

With talk of a ‘greater depression’ on the horizon, the government has launched a plethora of fiscal stimulus packages to keep the UK’s economy firing. Most recently, Chancellor Rishi Sunak announced a £1.25bn support package for high-growth companies impacted by the crisis and SMEs focusing on research and development (R&D).

The funding will be split unevenly between these two strands. The Chancellor has earmarked £500m for a ‘Future Fund’ aimed at scale-up businesses, made up of funding from government and the private sector. The rest of the money comprises grants and loans available through Innovate UK aimed at SMEs doing R&D.

For businesses hoping to access the latter of these two, I’d urge you to think carefully. If you don’t consider all your options, you could actually end up getting far less government funding than you should.

At present, there is a disconnect between the grants and loans offered by Innovate UK, which have been available for some years, and the Government’s R&D tax credit scheme. This can affect the future value of R&D tax credit claims, meaning businesses need a greater understanding of the facts before applying for Innovate UK’s fund. 

In terms of timing, Innovate UK grant applications are made upfront, before a project starts, whilst R&D tax claims are retrospective, up to two years after the start of a project. As a frequent first port of call for businesses doing R&D, Innovate UK needs to give solid guidance on how to best fund R&D projects. Currently, this isn’t happening.

We regularly meet companies who have applied for or received Innovate UK funding, but haven’t known about R&D tax credits, or not understood that they could be eligible until they speak to us – and for some, it’s then too late as they can’t maximise the funding available through both schemes.   

Businesses need to consider all funding options at the beginning of a project and choose the best combination for them.  However, by their nature, grants and R&D tax credits are usually considered at wildly different times, meaning there is then no scope to reverse a grant so it doesn’t affect an R&D claim. You can’t, as the saying goes, unspill a glass of milk.

This becomes more complex as Innovate UK has now moved some funding from grants to loans. Although the loan terms are more attractive than commercial loans, loans are still debts which have to be repaid and aren’t as advantageous as grants. Worse still, many companies don’t understand that these loans still carry the same restrictions as the grants on their R&D claims.  

Most Innovate UK grants are project-specific.  Although the Innovate UK funding is specifically for SMEs carrying out R&D, this isn’t subject to the same definition of R&D as counts for R&D tax credits. This can cause a mismatch between the project described in your grant documentation and what’s required for your R&D tax credit claim.

This leads to untold confusion for companies when it comes to making R&D tax claims, and subsequently, businesses can unwittingly submit incorrect claims. Businesses approach R&D claims with a pre-conceived idea of the definition of R&D, and projects, as described in the grant documentation, can be incredibly broad.

The award of an Innovate UK loan is a strong indication that the company is undertaking R&D. But there isn’t a seamless pathway of businesses getting the loans and claiming R&D tax credits later on. This discord is not what I’d expect to see and, worryingly, we have seen that sometimes the advice given on R&D tax credits by Innovate UK isn’t clear.

In one instance, we had a company misunderstanding their published FAQs and adopting an incorrect treatment in the R&D claim, resulting in them receiving much less than they had expected. If Innovate UK is going to advise, it should be accurate advice. 

Grant documents aren’t always clear regarding the state aid status of the grant itself – essential information for the company or its R&D tax adviser to adopt the correct treatment in the R&D claim.  How can a company be expected to get it right if they don’t even have the correct information in the grant documentation? 

Collaboration between Innovate UK and HMRC would benefit companies trying to navigate the seemingly complex world of R&D funding. A robust, collaborative approach could also direct unsuccessful grant applicants to R&D claims as an alternative form of funding and would perhaps enable those businesses to continue with their project, even though they have been unsuccessful in applying for the grant or loan. 

Innovate UK needs to use its reach to help raise awareness of R&D tax credits among the innovative businesses it interacts with (whether they are successful or unsuccessful businesses). It also needs to ensure that grant documentation is clear on the State aid status of each grant they award. 

Finally, Innovate UK needs to offer businesses clear and complete guidance – ideally produced in collaboration with HMRC, which sets out how the different grants interact with and affect R&D tax credits to ensure companies completely understand their options when it comes to government support and funding. 

Jenny Tragner is a member of HMRC’s R&D consultative committee and director at R&D tax credit specialist ForrestBrown.

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