Funding interactions: grants, investors and groups

Start-ups rarely fund development from revenue. They use grants, customer contracts and equity, often inside a small group of companies. Each source changes what can be claimed and by whom. After this module you will be able to read a grant letter, a development contract, a term sheet or a group chart and say what it does to the claim before it is signed.

What this module covers

The three questions behind every funding rule: who bore the financial risk, who owns the results, and who paid.
Grants: the three models the seven countries use.
Customer-funded development: why usually only one party can claim.
Investment and groups: how a funding round or a group structure changes status, thresholds and the claimant.

Three questions behind every funding rule

Who bore the financial risk? If the company would have been paid whether or not the work succeeded, several schemes treat the work as funded by the payer. In the United States, research is funded if payment to the taxpayer is not contingent on the success of the research. In Australia, expenditure is not eligible where another entity bears the financial risk and effectively owns the results.
Who owns the results? In the United States a taxpayer retains substantial rights if it has the right to use the research results in its trade or business without paying for that right; the right need not be exclusive. A company that gives away all rights is, in most schemes, working for someone else.
Who paid? Where the state paid, through a grant or subsidy, the schemes split three ways.

Grants: three models

Excluded or reduced. The grant-funded portion of the cost is not eligible, so the benefit is calculated on the remainder. Ireland, Canada and Singapore work this way, in different words.
No restriction. The cost stays eligible in full. The United Kingdom scheme for accounting periods beginning on or after 1 April 2024 contains no restriction for subsidised or grant-funded expenditure.
Clawed back. The benefit is claimed on the full cost, then an adjustment removes the extra benefit on the recouped amount. Australia works this way.

Country	How a grant interacts with the benefit
United States	Research is funded if payment to the taxpayer is not contingent on the success of the research, or if the taxpayer does not retain substantial rights in the research. Research is funded only to the extent of the funding.
United Kingdom	For accounting periods beginning on or after 1 April 2024 the merged scheme contains no restriction for subsidised or grant-funded expenditure.
Ireland	Expenditure met directly or indirectly by grant assistance or any other assistance from the State, an EU institution or any other state is not qualifying expenditure.
Canada	Qualified expenditures are reduced by government assistance, non-government assistance and contract payments that the claimant has received, is entitled to receive or can reasonably be expected to receive in respect of the expenditure.
Australia	Where an R&D entity receives a recoupment from an Australian government agency for expenditure on which it has claimed the R&D tax offset, a clawback adjustment includes in assessable income an amount calculated so as to remove the premium benefit of the offset on the recouped expenditure.
New Zealand	A person is eligible only if they control the R&D activities, bear the financial risk and effectively own the results, and expenditure on R&D performed for another person is ineligible. Check Inland Revenue's guidance on how government funding affects eligible expenditure before claiming for a funded project.
Singapore	R&D expenditure met by a government grant or subsidy is not deductible to the extent of the grant. Government grants are generally taxable as income unless specifically exempted; the letter of offer indicates the tax treatment.

Customer-funded development

Many start-ups do their first serious development under a paid customer contract. In most countries only one party can claim for the same work, and the contract decides which.

Canada: a contract payment received by a performer reduces the performer's qualified expenditures, so that the payer rather than the performer claims the credit.
Ireland: a company that subcontracts R&D to an unconnected person must notify that person in writing that it is claiming the credit, and the subcontractor may not then claim. New Zealand: the contractor cannot claim for the same activities as the claimant.
United Kingdom: a contractor may claim for R&D it undertakes on a contract where the customer did not intend or contemplate that R&D.

Before signing, read the clauses on payment milestones, intellectual property and the customer's intent, and keep the contract in the project file.

Investment and company status

Equity changes the company's status, and status decides the rate, the cash and the carry forward.

What a round can change	What shows it	What to check before closing
Size thresholds measured across connected companies	In the United Kingdom the SME definition includes linked and partner enterprises, and disregards certain venture capital and institutional investors in the linked enterprise test. In Australia aggregated turnover includes the annual turnover of connected entities and affiliates, including foreign entities.	Whether the investor's other holdings push the company over a threshold.
Control and residence of shareholders	In Canada a CCPC is not controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, public corporations or a combination, and a corporation must be a CCPC throughout the tax year to earn the enhanced credit for that year.	Whether non-resident or public investors will hold control after the round, including de facto control and rights under agreements.
Continuity tests on carried forward amounts	In New Zealand unused credits are carried forward subject to the shareholder continuity rules that apply to companies. In Singapore unabsorbed losses may be carried forward indefinitely subject to the shareholding test. In Australia an unused non-refundable offset is carried forward subject to continuity of ownership or business tests.	How much carried forward value is at risk at the planned change in shareholding.

Groups: who claims

Investors and IP advisers often leave a start-up with a holding company, an operating company and sometimes an IP company.

The claimant is normally the entity that incurs the cost, carries on the trade and keeps the results. Moving intellectual property to a separate company while the operating company does the work can fail the risk and ownership conditions above.
In the United States members of a controlled group compute the credit as a single taxpayer and allocate it in proportion to each member's eligible costs. In Canada associated CCPCs allocate a single expenditure limit among themselves by filing an agreement.
In New Zealand the refundability cap is adjusted for wholly owned groups. In the United Kingdom the R&D intensity ratio is measured across the company and its connected companies.

Draw the group chart and compare it with the country page before the structure is fixed.

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical loss-making company, has eligible costs of 100,000 in the year and receives a government grant of 40,000 towards the same project.

Model	Country	Arithmetic
Excluded	Ireland	Base 100,000 less 40,000 = 60,000. Credit at 30% = €18,000, against €30,000 with no grant. The grant brings in 40,000 and costs 12,000 of credit.
No restriction	United Kingdom	Base stays at 100,000. Expenditure credit at 20% = £20,000, taxable; for a loss-making company notional tax at the small profits rate (19 percent) gives a net benefit of 16.2 percent, or £16,200, subject to the PAYE and National Insurance cap.
Clawed back	Australia	The offset is claimed on the full 100,000. A clawback adjustment then includes in assessable income an amount calculated to remove the premium benefit of the offset on the recouped 40,000.

In each case the grant is worth taking: 40,000 of cash exceeds the benefit forgone, but the net figure should be known before committing. If Harbour Robotics then raises equity from a fund outside its country, the status table above shows what to check first.

Across the seven countries

United States: funded research exclusion based on risk and rights; controlled groups treated as a single taxpayer.
United Kingdom: no grant restriction for accounting periods beginning on or after 1 April 2024; SME status includes linked and partner enterprises.
Ireland: grant-assisted expenditure is not qualifying expenditure; the customer, not the notified subcontractor, claims.
Canada: assistance and contract payments reduce qualified expenditures; CCPC status decides the refundable rate.
Australia: clawback adjustment on government recoupments; aggregated turnover includes connected entities and affiliates.
New Zealand: the claimant must control the R&D, bear the financial risk and own the results; carry forwards depend on shareholder continuity.
Singapore: grant-funded expenditure is not deductible to the extent of the grant; grants are generally taxable unless exempted.

Module 3: Funding interactions