In these unprecedented times we are seeing support mechanisms from the government which are very generous and wide ranging. These are going a long way towards helping businesses to keep going and weather the storm so that hopefully they can come back stronger.
However the existence of these new schemes has raised questions around the implications of State Aid under the European rules, under which we are still (for the time being) regulated. There are limits as to how much State Aid a business can receive, and therefore it is crucial to keep an eye on how the different forms of aid interact.
We have had many questions from our clients about this, and this article attempts to bring together what we know at a high level to hopefully answer most questions our clients and contacts may have. However we are by no means experts in State Aid matters, and the overriding advice will always be to ask questions of the providers of support in terms of State Aid status and the effect the support might have on other forms of aid you already receive.
Broadly, this article focuses on two types of State Aid – Notified State Aid and De Minimis State Aid.
Notified State Aid
This is restricted in terms of a project for which it applies – it is not permitted to have more than one form of Notified State Aid in respect of any defined project. I have spoken to businesses in the past who have fallen foul of this where they have received a small grant for a product development project, but have then been denied R&D Tax Credits which in hindsight would have been worth far more.
Notified State Aid includes the following:
- R&D Tax Credits
- Grant funding (not all grants are so classified but a lot are, including most from Innovate UK – grant providers should be able to advise whether they are Notified or not)
- Support under the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan (BBL)
To avoid falling foul of the Notified State Aid rules, businesses should be clear in their applications for grants and support exactly what the funds will be used for. In the case of CBILS and BBL it is likely that the funds are for generally supporting the business rather than specifically for an R&D project, so eligibility for R&D Tax Credits is unlikely to be affected. However it is crucial to be clear about this in applications for CBILS and BBL and also to keep records to evidence what the funds have been spent on.
Grants which are Notified State Aid are often from Innovate UK and are typically for 70% of defined project costs. While this does mean that R&D Tax Credits cannot be claimed for the same project, at a 70% funding rate this is more beneficial anyway so businesses do not lose out, but where the rate of funding from a grant is lower than 70%, I would recommend speaking to the business’ R&D adviser first so that the business owner can understand the impact.
If the business cannot claim the R&D Tax Credits because of other Notified State Aid, then it can still claim R&D support under the large company R&D Expenditure Credit (RDEC) scheme, which although not as beneficial is still very worthwhile.
De Minimis State Aid
This is restricted to an overall limit of €200,000 over a rolling three year period.
There is a lot of support which classifies as de Minimis aid, and some of these are:
- Seed Enterprise Investment Scheme (SEIS)
- Employment Allowance
- Grants under the Small Business Grants Fund and the Retail, Hospitality and Leisure Grant Fund
- Lots of other local and national state funded support, including things like discounted advertising or consultancy services, discounted or free training, or purchases of land or property at less than market value. But there are many more too.
The State Aid status of the recently announced Future Fund is unclear at the moment.
De minimis aid should be tracked on a continuous basis by businesses as there are so many sources. Most small businesses are unlikely to fall foul of the rules for this, but in particular where a fledgling high growth business is obtaining equity finance it will want to make use of SEIS to make it more attractive to angel investors.
The Coronavirus Job Retention Scheme, although generous, is not classed as a State Aid because it is not a selective measure and therefore is not considered to distort EU competition. Therefore CJRS does not affect entitlement to any other State Aids.
SEIS status means that an investor can potentially claim a tax refund equal to 50% of the amount they invest for shares. However, this relief is classified as de minimis aid and counts against the company’s rolling 3 year limit of €200,000.
The way this works is rather odd, because when a company is seeking SEIS investment, the maximum it can obtain under the scheme is £150,000, but any de minimis aid obtained in the previous three years will be deducted from the available amount. However, if things happen the other way round, and SEIS shares have been issued for £150,000, then the amount the company has to track is the tax relief obtained by the investors – so potentially only £75,000 has to be tracked for the following three years.
As there are now so many kinds of de minimis aid available, it has become more important than ever for businesses to keep track of this, as if they hit their maximum they may be doing something which all small businesses may take for granted now and claim the Employment Allowance of £4,000 through the payroll to discount the Employer’s NIC, without realising they might not be allowed to due to the level of de minimis aid received elsewhere.
As you can see, this is a very complex area with a large number of variables, but hopefully this article has given a good overview to enable businesses to better understand when they should be ok and when they should be asking more questions about their particular circumstances.
If you want to chat through your situation in more detail, please contact James Geary on firstname.lastname@example.org or call 01242 776000 and request a call back.