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Claim R&D Tax Relief for Grant-Funded Offshore Energy Projects

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by Fawzi Abou-Chahine, FI Group

Claim R&D Tax Relief for Grant-Funded Offshore Energy Projects

Fawzi Abou-Chahine from FI Group weighs in on the importance of maximising R&D tax relief for grant-funded offshore energy projects. With extensive experience in helping businesses navigate the complexities of R&D tax credits, Fawzi provides valuable insights on how offshore firms can avoid common pitfalls and ensure they are fully leveraging available funding opportunities.

How to avoid common mistakes in R&D tax credit claims.

Recent statistics from HMRC indicate that SMEs in the offshore energy sector are increasingly funding their R&D projects through subsidised expenditure, either via grants or commercial contracts. However, many businesses miss out on potential tax relief simply because they don’t realise their grant-related expenditure is eligible. Below are five ways to help you identify if your project costs are suitable for relief, to help you maximise your funding.

1. What is a grant for accounting purposes?

An innovation grant is a financial aid, or subsidy, awarded to businesses to support a specific, well-defined R&D project. In the offshore energy sector, common grant providers include Innovate UK, the Net Zero Technology Centre and the Offshore Renewable Energy (ORE) Catapult. Unlike loans or equity, which are sources of capital income, innovation grants are generally considered taxable trading income. Most grants fund up to 70% of your projects, but some grants, such as Minimum Financial Assistance (MFA) grants, support 100% of costs.

2. Can you claim R&D Tax for grant-funded projects?

Yes, HMRC allows you to include subsidised project costs funded by a grant, or any other commercial contract. This is generally true for innovation grants, rather than environmental or capital expenditure grants, which focus on environmental sustainability or capital asset purchasing respectively. Some funding competitions are colloquially called grants, such as the Small Business Research Initiative grant, but these are technically commercial contracts. Nevertheless, SBIR-funded projects are treated as subsidised expenditure for R&D tax claim purposes.

3. What if my grant is a state-aid?

The UK is still bound by European Commission regulations that limit the level of state-aid that businesses receive. State aid is the European Commission’s way of saying financial assistance or grant subsidies. In simple terms, R&D tax relief is a form of state-aid, and an SME cannot receive state-aid twice to fund the same project. You need to know if your grant is considered state-aid or not before you can claim R&D tax.

3.1. Notified State Aids: These refer to typically large grants such as Innovate UK and Horizon 2020 Grants. They are called “notified” because the European Commission needs to approve and be aware of them, to prevent competition distortion.

3.2. Non-Notified State Aid: Includes smaller grants typically less than £300k. Examples include Minimum Financial Assistance (MFA) and Local Enterprise Partnership (LEP) Grants. These grants typically fund 100% of the project expenditure and are often provided at a regional level.

If you are in doubt as to what type of state-aid your grant is, check your contract and contact your grant funder.

4. What scheme can I claim under?

Historically, the main provision for claiming non-notified and notified state aid has been the RDEC scheme, which permits subsidised expenditure. Conversely, no project costs of a grant-funded project are eligible for R&D Tax relief under the SME scheme, due to state-aid rules. However, for most grant funded projects which required the business to match-fund a portion of their project expenditure, that non-grant funded portion may be claimed under the RDEC Scheme, if the project activities can be separated.

• ERIS: Exclusively open to any unprofitable SME that is R&D-intensive (spending at least 30% of total annual expenditure on qualifying R&D activities).
• MERGED SCHEME: Open to any sized business that is liable to pay corporation tax.

5. What costs can be included?

Innovation grants tend to fund the same cost categories as an R&D tax claim. In principle, most costs for a high-innovation grant project should therefore be an allowable expense. However, you need to make sure to exclude any costs for activities that do not qualify. For example, if there are portions of the project devoted to market research, any innovation that is more commercial rather than technical in nature, or activities in non-scientific fields such as humanities. Any other activity that is routine such as maintenance, or “business-as-usual” will also not be eligible. A good R&D Tax and Grant funding advisor can help you identify the best way to apportion these costs.

Summary

Always keep detailed documentation of the source of grant funding and how it was used to support your R&D project. When projects are partially funded by grants, you can apportion costs between subsidised and non-subsidised activities. However, the relationship between grants and R&D tax credits can be complex and understanding the new and complex legislation requires a trusted advisor to help you maximise your tax benefit. If you are subsiding your R&D projects through grants or commercial contracts, you should speak with an advisor to find out how to include qualifying costs to maximise your tax relief.

Contact FI Group for expert advice on R&D tax credits and grant funding.