Subsidised expenditure is R&D spending that somebody else paid for — a restriction in the old SME scheme that has now gone. For accounting periods beginning on or after 1 April 2024, the subsidised expenditure rules have been abolished, and grant funding no longer reduces what a company can claim. It still matters for accounting periods that began before 1 April 2024. Some of those can still be claimed or amended, with the final old-scheme deadlines falling around 30 and 31 March 2027. So the answer for your company turns on one date: when its accounting period began.
Does subsidised expenditure reduce a claim now?
No, not for current periods. Under the merged R&D scheme and ERIS, the 20% expenditure credit is worked out on qualifying expenditure whatever funded the project: a £100,000 spend part-funded by a £60,000 Innovate UK grant still generates the full £20,000 gross credit, with nothing to strip out and no project to ring-fence. Grant funding and R&D tax relief works that through in full.
Everything below is about periods that began before 1 April 2024.
What did the old rules say?
For accounting periods beginning before 1 April 2024, section 1138 CTA 2009 set out three separate ways expenditure could be subsidised. They did not work the same way, and the difference decided how much of a claim was affected.
- A notified State aid, meaning a State aid notified to and approved by the European Commission. Where one was obtained in respect of any expenditure attributable to the same R&D project, all the expenditure on that project was subsidised, not only the funded part. Many Innovate UK awards were notified State aids, which is where the idea of a grant tainting a whole project comes from.
- A grant or subsidy that was not a notified State aid. Here the restriction reached only as far as the money went. Expenditure was subsidised to the extent that the grant or subsidy was obtained in respect of it, so £60,000 of grant against £100,000 of spend subsidised £60,000 and left the other £40,000 alone.
- Expenditure otherwise met, directly or indirectly, by a person other than the company. The catch-all, and like the second limb it bit only to the extent someone else met the cost. This is the limb HMRC relied on in the enquiries that reached the tribunal.
Subsidised expenditure did not lose R&D relief altogether. It lost the SME scheme. It could then be claimed under the old RDEC scheme instead, at a lower benefit, provided the RDEC conditions were met — which they usually were for in-house costs, but not where the work had itself been contracted to the company.
Take the same £100,000 under the old rules. A profitable SME with a period beginning 1 January 2024 spends it on qualifying R&D, with a £60,000 grant that is not a notified State aid.
- The unsubsidised £40,000 stays in the SME scheme. The 86% additional deduction is worth up to 21.5p per £1 at the 25% main rate: £8,600.
- The subsidised £60,000 goes into old RDEC at 20%, worth 15p per £1 after corporation tax: £9,000.
- In the SME scheme that same £60,000 would have been worth £12,900, so the subsidy rules cost £3,900.
Had the grant been a notified State aid, all £100,000 would have moved to old RDEC.
Subsidised expenditure and contracted-out R&D are different tests
These are two separate restrictions, and they are constantly run together. The subsidised expenditure rules asked who paid for the spending. The contracted-out rules asked who commissioned the work. A company could be caught by one and not the other. HMRC often ran both arguments against the same old-scheme claim, which is much of why the two get confused; our guide to contracted-out R&D covers the second question.
A commercial price for a job is not automatically a subsidy
In Collins Construction and Stage One Creative Services, the First-tier Tribunal held that the third limb did not catch this spending: there was no clear link between the price the client paid and what the company spent on R&D. Neither decision was appealed, and HMRC updated its guidance in February 2025. Its position now is that where the R&D was not contracted to the company, a customer’s payment does not subsidise it unless the payment was specifically linked to the R&D. So a grant towards your R&D costs and a price for delivering a job are not the same thing — but the contract wording decides it, and a payment that does reimburse the R&D specifically can still be caught.
Who does this still matter for?
Companies with pre-April 2024 periods still open to amendment. Where a grant, a customer payment or a cautious adviser kept costs out of a claim at the time, that claim can often still be made or amended now. The window generally runs about two years from the end of the period of account; backdated R&D claims sets out the runway and the claim-notification rule that can close it early. It also matters in an open HMRC enquiry into an old-scheme claim, where that reasoning belongs at the centre of the response: see HMRC R&D enquiries and the tribunal verdicts.
For a current period, the short answer is in grant funding and R&D tax relief, and does grant funding stop me claiming? puts it in a line. For a period that began before April 2024, talk it through with a chartered adviser.
Sources
- CTA 2009 s1138 (as enacted) — the three limbs: notified State aid obtained in respect of “any other expenditure (whenever incurred) attributable to the same research and development project”, a grant or subsidy other than a notified State aid, and expenditure “otherwise met directly or indirectly by a person other than the company”. The section is omitted for accounting periods beginning on or after 1 April 2024.
- CTA 2009 s1052 (as enacted) — the old SME condition that “the expenditure is not subsidised (see section 1138)”.
- CTA 2009 s104G, as it stood at 31 March 2024 — subsidised qualifying expenditure on in-house direct R&D, the route by which subsidised SME spending was claimed under the old RDEC scheme; s104H did the same for subsidised payments to a subcontractor, but only where the subcontractor was a qualifying body, an individual, or a firm of individuals. Chapter 6A is omitted for accounting periods beginning on or after 1 April 2024.
- Merged scheme RDEC reform (policy paper) — “the rules relating to subsidised expenditure in the SME scheme were not carried forward into the new merged scheme”, for accounting periods beginning on or after 1 April 2024.
- CIRD81650: subsidised expenditure, post-tribunal — commercial contract payments are not, in themselves, subsidies, and the notified State aid position that no expenditure on the project can qualify under the SME scheme.
- Collins Construction Ltd v HMRC — [2024] UKFTT 951 (TC), 21 October 2024: the expenditure was not subsidised under section 1138, there being no clear link between the price paid by the client and the expenditure on R&D.
- Stage One Creative Services Ltd v HMRC — [2024] UKFTT 1059 (TC), 25 November 2024: the same conclusion on section 1138.
- R&D tax relief rates by year — the 86% additional deduction worth up to 21.5p per £1 at the 25% main rate, and old RDEC at 20% worth 15p per £1 net.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.