R&D tax relief •6 min read

Grant funding and R&D tax relief

MJ

Matthew Jones ACA CTA

Last reviewed July 2026

Grant funding does not block or reduce R&D tax relief. For accounting periods beginning on or after 1 April 2024, the subsidised expenditure rules have been abolished: a company can accept an Innovate UK grant, or any other grant, and still claim R&D tax relief on the full qualifying spend of the same project. Neither current scheme is notified state aid, so there is no state aid conflict either. Most of the contrary advice you will find online describes rules that no longer exist.

Does grant funding affect my R&D tax relief claim?

No, not for current periods. Under the merged R&D scheme, grant funding is simply irrelevant to the claim: the 20% expenditure credit is calculated on qualifying expenditure regardless of how the project was funded. The same is true of ERIS for loss-making, R&D-intensive SMEs. You do not need to strip grant-funded costs out of the claim, ring-fence the project, or choose between the grant and the relief.

In practical terms, that removes the old machinery entirely. There is no subsidised proportion to track, no splitting of one project across two schemes, and no risk that signing a grant offer letter quietly downgrades the tax position of work you have already done.

This holds whatever the funding source: Innovate UK, devolved government programmes, charitable foundations, EU schemes. For current periods, the source of the money no longer changes the tax analysis.

Why does so much advice still say grants restrict claims?

Because for years they did, and the internet has not caught up. Under the old SME scheme, which applied to accounting periods beginning before 1 April 2024, subsidised expenditure rules pushed grant-funded costs out of SME relief and into the old RDEC scheme at a lower benefit, and a notified state aid grant (which many Innovate UK awards were) could take an entire project out of SME relief altogether.

Those rules generated a decade of articles, adviser checklists and received wisdom, much of which still ranks well in search results and gets repeated by AI tools. If your accountant, your board or an investor believes a grant restricts your claim, they are almost certainly working from the old rulebook. A simple test when reading anything on this subject: if the article does not say which accounting periods it covers, assume it describes the pre-April 2024 position. We look at the practical side, including the errors advisers carry over from the old rules, in Innovate UK grants and R&D tax relief together.

Worked example: an Innovate UK grant and a merged scheme claim

A company spends £100,000 on qualifying R&D in an accounting period beginning on or after 1 April 2024. An Innovate UK grant covers £60,000 of the project’s costs.

Under the merged scheme the grant changes nothing. The full £100,000 of qualifying spend generates a £20,000 gross credit, worth £15,000 net at the 25% corporation tax rate, or £16,200 where the 19% rate applies or the company is loss-making. The company keeps the grant and receives the credit.

Under the old SME rules, the same facts produced a very different answer, with the subsidised spend relegated to old RDEC and the balance needing careful separation. For current periods that analysis is history. It only still matters for older periods, covered below.

Does a grant affect an ERIS claim?

No. Enhanced R&D Intensive Support (ERIS) is available to a loss-making SME whose relevant R&D expenditure is at least 30% of its total relevant expenditure, and grant funding does not affect entitlement. ERIS is not notified state aid, so receiving a state aid grant creates no cumulation problem.

For this purpose an SME means a company with fewer than 500 staff and either turnover under €100m or a balance sheet under €86m, with connected and partner enterprises aggregated. Connected companies also count on both sides of the 30% intensity ratio, and a one-year grace period protects companies whose intensity dips below 30% after a qualifying year.

For a qualifying company, ERIS is worth up to 26.97p per £1 of qualifying spend: on the standard example, £100,000 x 186% x 14.5% = £26,970 as a payable credit, given sufficient losses. This combination matters most to pre-revenue deep tech companies, exactly the businesses whose R&D runs on grant funding. A grant-funded biotech or robotics company that was told years ago its claims were restricted should look at the position again.

What about grant-funded R&D in periods before April 2024?

The old rules still apply to old periods. Accounting periods beginning before 1 April 2024 remain subject to the subsidised expenditure rules, and claims for those periods can generally still be made or amended for roughly two years from the end of the accounting period, with the final old-scheme amendment deadlines falling around 30/31 March 2027. If you under-claimed, or did not claim at all, because of a grant, that is worth revisiting before the runway closes: see backdated R&D claims and the March 2027 deadline.

There is also a live defence point for old periods. In Collins Construction and Stage One Creative Services, the First-tier Tribunal held that payments under ordinary commercial contracts are not subsidies. HMRC declined to appeal and updated its guidance in early 2025. Where HMRC has argued that client-funded work was “subsidised” under the old rules, these decisions carry real weight. We use them in enquiry defence, covered in how we defend R&D claims in HMRC enquiries.

Practical points for grant-funded claimants

  • Claim notification still applies. If your company has never claimed R&D relief, or has not claimed in the previous three years, you must notify HMRC within six months of the end of the period of account or the claim is invalid. Grant recipients making a first claim miss this more often than most, because they assume the grant paperwork covers it. See the R&D claim notification requirement.
  • The grant project and the R&D project are not the same thing. The funder’s project definition follows your application; the R&D claim’s boundaries follow the technological uncertainty. Expect overlap rather than identity, and keep records that let you evidence both.
  • Cash credits are capped by payroll. Both current schemes apply a PAYE and NIC cap of £20,000 plus 300% of the company’s relevant PAYE and NIC, with an exemption where conditions on IP creation or management and low connected-party subcontracting are met. Grant-funded companies with small UK payrolls should check the cap before relying on a projected credit.
  • Grant paperwork helps the claim. A funding application that sets out technical objectives and risks, written before the work began, is exactly the kind of contemporaneous evidence an R&D claim benefits from.

If you were told a grant ruled out your claim

The rule that produced that advice was abolished for accounting periods beginning on or after 1 April 2024, and the current schemes support exactly the companies the old rules penalised. If you are unsure where you stand, which R&D scheme applies to your company walks through the decision, and the rest of our R&D tax relief guides cover each scheme in depth.

For a view on your own funding mix, current periods or old ones, talk it through with a chartered adviser. We will tell you plainly whether there is a claim worth making.

Written by Matthew Jones ACA CTA. Last reviewed July 2026.

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