Worked example: a grant-funded programme under the current schemes

This page costs out a part grant-funded development programme in full: £520,000 of qualifying expenditure, a £450,000 Innovate UK grant sitting alongside it, and £84,240 paid to the company in cash. Example Energy Systems Ltd is an invented company and every figure here is illustrative. What the page is testing is what the grant does to the claim, which under the current rules is nothing.

The accounting period is 1 January 2025 to 31 December 2025. The company is loss-making and claims under the merged scheme.

Does the grant reduce the claim?

No. For accounting periods beginning on or after 1 April 2024 the subsidised expenditure rules are not carried into the current schemes, and the relief is worked out on the full qualifying expenditure whatever funded it. There is no subsidised proportion to track, no splitting of one programme across two schemes, and no need to strip grant-funded costs out. Neither current scheme is notified State aid: the merged scheme sits in CTA 2009 Part 13 Chapter 1A and ERIS in Chapter 2, and neither carries the State aid character that barred an SME claim under the old scheme.

That needs saying plainly, because most published advice on the subject still describes the position before April 2024. A useful test: if an article does not say which accounting periods it covers, assume the rules it describes are gone.

The programme is the development of a phase-change thermal store for industrial process heat. The baseline is what the field could already do: commercially available salt hydrate stores lose roughly a fifth of usable capacity within 3,000 charge cycles as the medium segregates, and the documented methods of suppressing it either cut energy density by a comparable margin or hold only at laboratory scale. The advance sought belongs to the field, not to the company: a store holding its rated capacity beyond 10,000 cycles at no loss of energy density. The uncertainty is whether segregation can be suppressed in a full-scale module by container geometry and nucleating additive together, when no published work and no available model predicts behaviour at that scale. Resolution is being attempted through a structured matrix of composition and geometry variants on accelerated cycling rigs, then two instrumented pilot modules, and at the period end the question is part answered.

What did the company spend?

The £1,200,000 programme includes work that does not qualify. What survives is this.

Payments to unconnected subcontractors qualify at 65% of the relevant portion under CTA 2009 s1136, and staff provision payments for externally provided workers from an unconnected provider at 65% of so much of the payment as is attributable to the workers’ qualifying earnings under s1131(2), with qualifying earnings defined at s1132A. So £180,000 of contractor payments enters at £117,000 and £60,000 of external worker cost at £39,000. The contracted work was undertaken in the UK, so the overseas restrictions cut nothing further.

The £450,000 grant appears nowhere in that table and changes none of those figures.

Which scheme applies?

The company has a manufacturing operation alongside the development work, so its total relevant expenditure for the period is £2,400,000 against £520,000 of relevant R&D expenditure. That is 21.7%, below the 30% intensity condition, so ERIS is not available and the merged scheme applies. Grant income does not enter that fraction either; both sides of it are expenditure. The ERIS intensity calculator models the test, and which scheme applies to your company covers the wider decision.

What the company receives

The notional tax at step 2 comes off at the 19% small profits rate rather than the 25% main rate because the company has no profits chargeable at the main rate, which is why a loss-maker keeps more per £1 than a profitable claimant. The cap at step 3 is £20,000 plus 300% of relevant PAYE and National Insurance contributions, which on this payroll gives £1,040,000 against a credit of £84,240, nowhere near binding. A company running most of its programme through subcontractors on a thin UK payroll can get a different answer.

Note that the £19,760 withheld at step 2 is not forfeited: it can be surrendered to a group member or set against corporation tax for a later period, though it only ever discharges tax and is never paid in cash.

What would the same grant have cost a year earlier?

The company’s previous accounting period, 1 January 2024 to 31 December 2024, began before 1 April 2024, so it runs on the old schemes. It remains within the claim window, which is two years from the end of the period of account, closing on 31 December 2026. Qualifying expenditure for that period was £380,000, all of it on the grant-funded programme, and the company was loss-making and not R&D-intensive on the old scheme’s own 40% test. It had losses at least equal to the enhanced expenditure, so the SME figure below is the full one.

HMRC’s manual put the old position this way: “If a company is in receipt of a notified State aid for an R&D project it cannot also claim SME R&D relief for that project.” The alternative route was RDEC, and £13,680 is the difference between the two.

So: the same company, the same grant, one year apart. In the 2024 period the grant cost it £13,680. In the 2025 period it costs nothing.

What the claim looks like on the form

The claim populates the Additional Information Form with company details: unique taxpayer reference, employer PAYE reference number, VAT registration number, business type or SIC code; the senior internal R&D contact and every agent involved; the accounting period start and end dates, which must match the Company Tax Return; qualifying expenditure by category exactly as the inputs table above sets it out, with the portion of each category attributable to qualifying indirect activities identified separately; and the number of projects and the project descriptions.

There is no field for grant funding, because it no longer bears on the calculation. The figure entered as qualifying expenditure is the full £520,000. Under the old rules an adviser would have been splitting those same costs across two schemes. What the form does demand is sequence: it must reach HMRC before or with the CT600, never after. A claim filed the other way round is defective. The Additional Information Form goes through the fields in full.

What changes the answer

1. A backdated claim for the 2024 period. That period is still open until 31 December 2026, and a claim for it needs its own Additional Information Form and its own notification analysis, on the old rules and the old rates: see backdated claims.
2. Claim notification. A first-time claimant, or one that has not claimed in the three years ending with the notification deadline, must notify HMRC within six months of the end of the period of account, or the claim is invalid however good it is. Grant recipients miss this more often than most, because they assume the grant paperwork covers it. See the claim notification requirement.
3. A Northern Ireland registered company claiming ERIS. One State aid rule survives, and it is not a grants rule: a de minimis limit on the additional benefit of an ERIS claim by a company whose registered office is in Northern Ireland. It reaches every such claimant whether or not it has ever held a grant. Companies registered in Great Britain are unaffected wherever in the UK they trade, and grant funding and R&D tax relief sets the limit out in full.
4. The grant programme and the R&D are not the same thing. The funder’s boundary follows the application; the claim’s boundary follows the technological uncertainty being resolved. Expect overlap rather than identity. A funding application written before the work began is useful contemporaneous evidence for the claim.

Talk it through with a chartered adviser

The arithmetic above is the straightforward part. What decides the number is which work meets the definition, which costs fall in the qualifying categories and how staff time is apportioned. Those judgements are what HMRC looks at when it checks a claim, and HMRC checked around one in six R&D claims in 2023-24, its latest published figure.

For an estimate on your own figures, use the claim value calculator. The other examples are collected in the worked examples index, and the schemes themselves in the R&D tax relief guide.

A chartered adviser reviews and signs off every claim this firm prepares before it goes to HMRC, and enquiry support is included as standard. If you hold a grant and were told it restricted your claim, get in touch and we will tell you plainly whether that is still true.

Sources

• Merged scheme RDEC reform (policy paper) — the subsidised expenditure rules not carried into the merged scheme from 1 April 2024.
• Merged scheme and ERIS guidance — the current schemes, the 20% credit and the 30% intensity condition.
• CTA 2009 s1042G — the 20% relevant percentage.
• CTA 2009 s1042I — the seven payment steps.
• CTA 2009 s1042K — the notional tax deduction at step 2, at the small profits rate where the company has no profits chargeable at the main rate.
• CTA 2009 s1042L — the amount deducted at step 2 surrendered to a group member or applied against corporation tax for a later period.
• CTA 2009 s1112B — the cap of £20,000 plus three times relevant PAYE and NIC liabilities.
• CTA 2009 s1131 — subsection (2), qualifying expenditure on externally provided workers where the parties are not all connected: 65% of so much of the staff provision payment as is attributable to qualifying earnings.
• CTA 2009 s1132A — what qualifying earnings are: earnings on which PAYE and Class 1 NIC are accounted for in respect of any part of them, and otherwise earnings attributable to R&D undertaken outside the UK to which section 1138A applies.
• CTA 2009 s1136 — the qualifying element of a contractor payment: 65% of the relevant portion.
• CIRD81670: notified State aid under the old rules — a company in receipt of a notified State aid for an R&D project cannot also claim SME R&D relief for that project, with RDEC the alternative route.
• CTA 2009 s1058 as it stood on 1 January 2024 — the old SME payable credit at 10% of the surrenderable loss for a company that was not R&D-intensive.
• CTA 2009 s104N as it stood on 1 January 2024 — the old RDEC steps, with step 2 reducing the set-off amount to its net value by deducting corporation tax at the main rate.
• Tell HMRC you plan to claim — the six-month claim notification window.
• Additional information form guidance — the form filed before or with the CT600.

CIRD81670 is indexed on our CIRD reference index, with HMRC’s own title for it, a line on what it says and the date HMRC last revised it.