The rules relating to State aid are applicable to all European Union (EU) member states and ensure no one business or group of businesses are selected to receive an unfair financial advantage by their own government.
Generally State aid is not allowed by the EU commission however some forms of aid are recognised as advancing the delivery of growth and policy objectives without having the effect of distorting the market, this aid is pre-approved by the EU commission.
Notified State aid
A notified State aid is notified to and approved by the EU Commission on a case by case basis. An example would be the Small and Medium-sized Enterprises (SME) scheme of Research & Development (R&D) Tax Credits– with a limit of €7.5m on the amount which anyone company can receive for a qualifying R&D project.
General Block Exemption Regulations (GBER)
To cut the administration burden, aid can be “block exempted”. This is a general exemption for aid designed to encourage businesses to make capital expenditure on establishments, processes or to undertake new activities. An example of this would be the previous tax break for Enhanced Capital Allowances
Small amounts of State aid are exempt from notification and control as they are deemed to have little or no impact on competition and trading. An example of this would be the Employment Allowance from April 2020.
To comply with the de minimis regulations the business must not exceed the de minimis State aid cap for the sector traded in, during a rolling three-year period.
The sector caps are:
|Fisheries and aquaculture||€30,000|
|Road Freight Transport||€100,000|
|All other industries||€200,000|
State aid is also recognised by the EU Commission as necessary to make good the damage caused by natural disasters or exceptional occurrences. This must also be pre-approved by the commission. The Covid-19 pandemic was recognised by the Commission as an exceptional occurrence and the Temporary Framework was fast tracked and approved.
The measures of the Temporary Framework
Provisions which are not classified as State aid
Coronavirus Job Retention Scheme (CJRS) is a grant available to all businesses and is therefore not State aid
VAT and SA Tax Deferrals are available to all businesses and is therefore not State aid
Business Rate relief is not State aid due the exceptional impact on the sectors receiving the relief.
The Future Fund is not State aid, as it was designed as funding which exactly matches the independent market.
Provisions which fall within the de minimis category
The Employment Allowance from April 2020
Bounce Back Loans. The 12 months of interest paid by the government if the business was in difficulty at 31 December 2019
Start-up loans are not a Covid-19 measure and are under normal State aid rules
Small Business Grant Fund – the grant can be paid as de minimis aid over 3 years or under the Temporary Framework
Provisions which are notified State aid under the Temporary Framework
Bounce Back Loan. 12 months of interest paid by the government- if the business was not a business in difficulty at 31 December 2019.
Coronavirus Business Interruption Loan Scheme (CBILS)
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
Guarantee of loan facilities and direct grants
Small Business Grant Fund – the grant can be paid under the Temporary Framework once the de minimis limit is exceeded.
Statutory Sick Pay rebate
Retail, hospitality, and leisure grant fund – only if the undertaking was not in difficulty on 31 December 2019
Self Employed Income Support Scheme
The impact of State aid on SME R&D tax credits claims
The legislation covering The Small and Medium-sized Enterprises (SME) scheme of Research & Development (R&D) Tax Credits contains an exclusion for expenditure that has been subsidised in any way, including grants, general subsidies and State aid.
This means that the receipt of any subsidy in respect of R&D project expenditure will result in a restriction of the expenditure eligible to be included in the claim under the SME R&D scheme.
Depending on the classification of the subsidy the restriction can range from the total denial of all the qualifying expenditure under the SME scheme to the denial of only the part of the expenditure which received the subsidy.
There is the alternative scheme – the R&D Expenditure Credit (RDEC) scheme which can be used for any expenditure which is excluded from the SME scheme however this alternative scheme is generally less financially favourable.
The Employment Allowance (EA) from April 2020
The EA from April 2020 is part of the de minimis State aid classification and as such potentially affects the expenditure of an R&D project which it funds:
- A company cannot claim SME R&D tax credit for costs within a project that are funded by de minimis aid.
- A company can claim SME relief or payable credit for costs within the project not funded by de minims aid.
One of the largest parts of an R&D claim is usually the staffing costs however 100% of the staffing costs of the business are not usually included in the claim. It is unlikely that the whole of the EA received will therefore be excluded from the SME R&D scheme claim only the apportioned amount.
The Covid-19 Temporary Framework Measures
HM Revenue and Customs have confirmed that all of the measures brought in under the Covid-19 Temporary Framework will potentially affect the claim for expenditure under the SME R&D tax credits scheme however it should be noted that only the R&D project expenditure which is subsidised will be potentially excluded.
It will be taken on a case by case basis looking at the State aid received and to what extent the State aid was used generally across the business or if the aid was specific to the R&D project.