Can You Claim R&D Tax Credits on a Grant-Funded Project?

In recent years, Ireland has performed remarkably well on the global scale when it comes to innovation funding. Both internally and internationally, more Irish companies are accessing funding for ground-breaking projects than ever before.

From Ireland’s own DTIF mechanism, to the Europe-wide Horizon Europe funding programme, Irish businesses have received huge boosts to develop technologies for societal benefit.

Can I claim R&D tax credits on grant-funded projects?

The short answer is yes, partially.

The key is only claiming for non-funded costs. Revenue’s own guidelines state:

“Any expenditure which is met directly or indirectly by any grant aid or assistance from

• • the State,
  • or a relevant Member State of the EU, EEA, or the UK,
  • or any board established by statute,
  • or any public or local authority or any other agency of the State,
  • or of another relevant Member State of the EU, EEA, or the UK,
  • or an institution, office, agency or other body of the European Union,
  • or a state, other than the State or a Member State,
  • and any board, authority, institution, office, agency or other body in such state

will not qualify for relief.”

However, as most grants will only fund a project to a certain point, the unfunded portion can be claimed.

For example, a project funded by Horizon Europe’s EIC Accelerator is only ever funded up to 70%. The other 30%, which is self-funded, is eligible for R&D tax credits.

Claiming your maximum R&D tax credit

When filing their R&D tax credit claim, it’s common for some accountants to deduct the entire grant funding amount from their eligible R&D tax expenditure, not realising that some costs may be ineligible and, therefore, unnecessarily deducted.

Although you can’t claim any type of tax credit on grant-funded expenditure, you don’t have to deduct the entirety of the grant funding to determine the eligible amount.

By removing any expenditure that is ineligible for R&D tax credits from the total grant-funded amount, you’ll only deduct the necessary grant-funded expenditure from your R&D tax credit claim.

For example:

A funding body provides Company A with a grant of €700,000 (70% of the €1 million necessary for the project).

€300,000 is spent on staff costs in Ireland, €200,000 on consumable items, €250,000 on subcontractors in the EU and €250,000 on subcontractors based in the US. The grant funding covers 70% of each of these categories (€700,000). Only the first three categories are eligible for R&D tax credits, giving a total of €750,000.

Company A initially decides to deduct the grant-funded total from the costs eligible for R&D tax credits but is then advised by an R&D tax specialist to assess which costs of the grant-funded project were actually eligible.

Initially, Company A would’ve calculated the eligible expenditure by deducting the entire grant-funded portion of €700,000 from the R&D tax eligible costs. The eligible costs are worth €750,000 (everything but the US subcontractors). This leaves the company with €50,000 in eligible expenditure. At the R&D tax rate of 30%, the company can expect a credit of €15,000.

With the new advice, Company A correctly calculates that only €525,000 should be deducted from the eligible costs (i.e., 70% of the staff costs, the consumables and the EU subcontractors). This results in R&D eligible costs of €225,000 instead, and a credit of €67,500.

So, by deducting only the necessary costs, instead of receiving €15,000 as a Corporation Tax Saving, they’ll get a whopping €67,500, which represents nearly 7% of the project value.

How do grants impact your R&D tax claim?

This is a challenging area of tax law and can easily result in errors, either in overclaiming or underclaiming. The first could mean an Aspect Query from Revenue, which requires time and energy to defend your claim, or potentially paying back your credit. The second means that you’ve left money on the table, which is not ideal for companies working on risky, innovative projects.

At Myriad, we’ve worked on R&D tax credit claims and grant funding bids for many years. We do the heavy lifting, so you don’t have to.

Get in touch with our expert team to find out what you could claim.