Loans or Grants : Opportunity or Threat to SME Innovation
27th November 2015
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With the Autumn Statement being read at Lunchtime yesterday, there had been a significant number of rumours that whilst the headline Science Budget was to be increased, Innovation Grants were set to be replaced by Innovation Loans and as is often the case those people who have access have got the story right. While there was no change to R&D Tax Relief in the headlines, the change from Grants to Loans could be an interesting one, apparently the French did something similar a few years ago.

Could such a change be an opportunity or a threat to SME Research and Development (R&D) across the country?

At the moment Grants tend to be used to fund Research and Development primarily through Innovate UK, there are targeted calls aimed at a specific industry or wider problem and a range of “general grants” such as SMART, or Innovation Vouchers. These grants tend to be EU State Aid. There are a range of other grant providers targeted at R&D, these are provided by MAS, Growth Accelerator and Local Authorities, these grants are either EU State Aid or de minimis aid.

The obvious benefit of the Grants is that they aren’t repayable, they tend to cover costs from anywhere from 30% to 75% of the cost of a project so they can be a real boost to a company’s cashflow (especially a start-up, who may be pre-trading) during an intensive R&D phase.

The downside to grants is that because they are EU State Aid and de minimis Aid, it has an impact on a company’s ability to claim SME R&D Tax Relief and to benefit from the extremely generous tax relief of 46% of the cost of R&D (or 33% if the company is in losses and surrenders those losses).

So what would loans look like, well to be honest nobody really knows, it will all be in the small print, which we will hopefully learn later today. Will they be:

  • interest-free, fixed interest rates or variable?
  • a bit like a student loan, repayable once the project reaches a certain milestone and the company is generating revenue from it and repays a percentage of the revenue?
  • a bit like a bank loan,but maybe with a 12 month delay in making the initial repayments so that the R&D has a chance to be completed?
  • some sort of hybrid loan?
  • will they be EU State Aid or de minimis aid?

I think if there is a requirement of repayment of the loan then it is highly likely that they will fall outside the remit of EU State Aid and de minimis aid unless the repayment terms are ridiculously long and repayment is unlikely.

The answer though is unknown outside the walls of Whitehall and perhaps a few well informed journalists!

Such changes might also fuel the ever growing alternative finance market, so get ready for more crowdfunded business who might think going to the private sector earlier is a better bet than being in hock to the Government for a loan.

A removal of the grants, might also present an opportunity for Gerorge Osborne to further enhance the uplift for SME R&D Tax Relief from 130%, or the percentage increase for RDEC from 11%.

Despite being an accountant, I tend to see the glass as half full, so I always feel there is an opportunity in everything. If the loans aren’t EU State Aid or de minimis aid then I think it will present a great opportunity for companies to enhance the benefit of R&D Tax Relief to finance a significant part of their R&D project, it may not be as quite as good as a grant but in combination with a loan could still have a very positive effect on a company’s cashflow.

So if you are running an SME business, or a Finance Director who has been involved in grant applications and is involved in R&D anywhere across the country do you have an opinion on whether the switch to loans will change your outlook on R&D? 

About the Author

Simon Bulteel - Cooden Tax Consulting

Member since: 27th August 2015

Simon Bulteel is the owner and Managing Director of Cooden Tax Consulting, a division of Cooden Consulting Limited. A niche tax consultancy specialising in Research and Development Tax Relief, Patent Box...

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