An Innovate UK grant and an R&D tax relief claim can sit on the same project, at full value, for accounting periods beginning on or after 1 April 2024. The subsidised expenditure rules that once pushed grant-funded work into a lower-value scheme were abolished with the old SME scheme, and neither the merged scheme nor ERIS is notified state aid, so there is no state aid conflict either. The two supports now stack.
That is the whole legal position, and it is set out in full on our pillar page, grant funding and R&D tax relief. This article covers the practical side: what the combination is worth, how to run the project accounting, and the errors advisers still carry over from the old rules.
What is the combination worth?
Take the standard example. A company spends £100,000 on qualifying R&D in a period beginning on or after 1 April 2024, and an Innovate UK grant funds part of the project. The grant changes nothing in the tax computation. Under the merged scheme, the full £100,000 generates a £20,000 gross credit, worth £15,000 net at the 25% corporation tax rate and £16,200 where the 19% rate applies or the company is loss-making.
A loss-making SME whose relevant R&D expenditure is at least 30% of its total relevant expenditure does better still under Enhanced R&D Intensive Support (ERIS): £100,000 x 186% x 14.5% = £26,970 as a payable credit, which is not taxable. Many Innovate UK award holders are exactly this kind of company, which is why the abolition of the old restriction matters most to them.
One detail worth stating plainly: the ERIS intensity test is a ratio of expenditure to expenditure. How the spending was funded does not enter the calculation, so grant income neither helps nor hurts the 30% test.
Do you need to separate grant-funded costs from the claim?
No. There is no subsidised proportion to strip out, no ring-fencing of the funded work package, and no splitting of one project across two schemes. The qualifying expenditure is the qualifying expenditure, whoever funded it.
What you do still need is two sets of project boundaries, because the grant project and the R&D claim project are not the same thing:
- The grant project is defined by your application and offer letter: the work packages, milestones and eligible costs you report to Innovate UK under the funder’s rules.
- The R&D claim project is defined by the DSIT guidelines: it starts where work to resolve a scientific or technological uncertainty begins and ends where the uncertainty is resolved or abandoned. What counts as qualifying R&D covers the test in full.
Expect overlap rather than identity. A grant project often contains work packages that do not qualify for tax relief (commercialisation, dissemination, market research), and qualifying R&D often continues beyond the grant’s scope, in match-funded work and follow-on development. Code your costs so you can report to the funder and evidence the claim from the same ledger, and keep both definitions visible in the file.
There is also a quiet benefit in the paperwork. An Innovate UK application sets out technical objectives, the state of the art and the risks, written before the work began. That is close to ideal contemporaneous evidence for the claim’s technical narrative.
Which old-rule errors do advisers still make?
Five recur, all inherited from the pre-April 2024 rulebook.
- Stripping grant-funded costs out of the claim. Under the old SME scheme, subsidised expenditure had to be identified and relegated to old RDEC. For current periods that machinery is gone, and removing the costs simply understates the claim.
- Splitting one project across two schemes. The old grant-funded RDEC plus SME-relief-on-the-balance analysis no longer exists. Current periods have one answer per company: merged scheme or ERIS.
- Advising companies to refuse or defer grants to protect the relief. Under the old rules a notified state aid grant could take an entire project out of SME relief, so the advice had a logic. Today there is no trade-off to manage, and turning down non-dilutive funding to protect a tax claim is a straightforwardly bad decision.
- Running state aid analysis on current claims. How an award was classified for state aid purposes mattered greatly before April 2024. Neither current scheme is notified state aid, so for current periods the classification of the grant has no bearing on the claim.
- Leaving old periods unrevisited. The old rules still govern accounting periods that began before 1 April 2024, and companies that under-claimed because of a grant may still be able to amend: the final old-scheme amendment deadlines fall around 30/31 March 2027. See backdated R&D claims and the March 2027 deadline.
A reliable test when reading anything on this subject, including advice you were given at the time of your award: if it does not say which accounting periods it covers, assume it describes the old rules.
What should grant-funded claimants still watch?
Three compliance points, none of them grant-specific but all of them common in grant-funded companies.
Claim notification. A company that has never claimed, or has not claimed in the previous three years, must notify HMRC within six months of the end of the period of account, or the claim is invalid. Grant winners making a first claim miss this more than most, often assuming the grant paperwork covers it. It does not. See the claim notification requirement.
The Additional Information Form. Every claim needs an AIF submitted before or with the CT600, naming the senior internal R&D contact and every agent involved. The project descriptions in it should reflect the R&D claim boundaries, not the grant work packages.
The PAYE cap. Payable credits under both schemes are capped at £20,000 plus 300% of relevant PAYE and NIC, with an exemption where the company is creating or managing intellectual property and connected-party subcontracting stays low. Grant-funded companies running lean teams with outsourced delivery should check the cap before relying on a projected credit.
The companies this matters to most
Grant-funded deep tech businesses, biotechs above all, were the companies the old rules penalised hardest, and they are the companies with the most to gain from the current position. Our biotech sector page covers how ERIS, grants and the PAYE cap interact for a typical pre-revenue company.
If you hold an Innovate UK award and were told, at any point, that it restricted your R&D claim, the position deserves a fresh look: current periods under the current rules, and older periods while the amendment window remains open. Talk it through with a chartered adviser and we will tell you plainly what is claimable.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- Merged scheme & ERIS guidance — the 20% merged-scheme credit and the ERIS payable credit for loss-making, R&D-intensive SMEs.
- Merged scheme RDEC reform (policy paper) — the merged scheme from 1 April 2024, under which the old subsidised-expenditure restriction was not carried forward.
- R&D relief for SMEs (definition & old rates) — the SME definition and the pre-merger SME relief rates.
This article describes the rules as they stood at the review date above. The rules change: for the current position, start with our guides or talk to us.
