1. The Short Answer: Yes, You Can Usually Claim Both
Direct Answer
Receiving an Innovate UK grant does not prevent you from claiming R&D tax credits. The two mechanisms are separate, administered by different government bodies, and designed to work alongside one another. You cannot claim on the same costs twice, but the company-funded portion of a grant project, and all R&D activity outside the grant project, can form the basis of an R&D tax credit claim under the merged scheme. Most Innovate UK grant recipients who have not claimed R&D tax credits are leaving a material tax benefit unclaimed.
Companies that have won competitive Innovate UK funding have, by definition, passed a rigorous assessment of their R&D credentials. They are, almost without exception, conducting qualifying R&D activity. They are also among the best-documented R&D performers in the UK: Innovate UK requires detailed technical project plans, milestone reporting, and cost records as conditions of grant funding. The documentation that satisfies Innovate UK's requirements is largely the same documentation that supports a robust R&D tax credit claim.
The question is not whether you qualify. The question is how to calculate your eligible costs correctly under the rules that apply to grant-funded projects, and whether your R&D activity beyond the funded project has also been captured.
2. How Innovate UK Grants Work
Innovate UK is part of UK Research and Innovation (UKRI), the body that oversees publicly funded research and innovation in the UK. It awards grants to businesses to develop and demonstrate innovative technologies, typically as part of a specific competition aligned to a strategic priority area.
Grants are awarded as a proportion of total project costs, not as a full funding of the project. The grant covers a specified percentage of eligible project costs, which varies by scheme and company size. SMEs typically receive between 60 and 70 per cent of eligible costs from the grant, with the remaining 30 to 40 per cent contributed by the company itself. Large companies receive a lower grant proportion, often 50 per cent or less.
The grant agreement specifies which cost categories are eligible: typically staff costs, subcontractor costs, consumables, travel, and overheads up to a capped percentage. The company is required to co-fund the project, meaning it must contribute genuine additional resource rather than simply treating the grant as full project funding.
It is the co-funding requirement that creates the R&D tax credit opportunity. The costs that the company funds from its own resources, on a project that meets the qualifying criteria, are eligible for R&D tax relief. The grant-funded portion is not. The distinction between these two pools of expenditure is the foundation of the combined claim strategy.
3. The Old Rules vs the New Rules
The interaction between Innovate UK grants and R&D tax credits changed materially from April 2024. Understanding the change matters because it affects both current claims and retrospective claims for accounting periods straddling the transition.
| Rule | Pre-April 2024 (SME Scheme) | Post-April 2024 (Merged Scheme) |
|---|---|---|
| Scheme applicable to SMEs | SME R&D relief: enhanced deduction of 130% on qualifying costs (later reduced to 86%) | Merged RDEC scheme: 20% above-the-line credit on qualifying costs. All companies use the same scheme. |
| Innovate UK grant classification | Classified as notified state aid under UK subsidy rules | No longer classified as notified state aid in the same way; subsidy rules apply differently under post-Brexit UK framework |
| Effect of grant on SME scheme claim | Notified state aid for a project pushed the entire project out of the SME scheme into RDEC, which had a lower net benefit rate at the time. Known as the "contamination" effect. | No contamination effect. Grant recipients claim under the merged scheme on the same basis as all other companies. The ring-fencing rule applies but there is no scheme downgrade. |
| Grant-funded costs | Cannot be included in any R&D claim. Ring-fencing rule applied. | Cannot be included in any R&D claim. Ring-fencing rule still applies. |
| Company-funded costs on grant project | Could only be claimed under RDEC (lower rate) if the project received notified state aid | Claimed under the merged scheme at the standard 20% rate, same as all other qualifying expenditure |
| R&D outside the grant project | Unaffected by grant; claimed under SME scheme at full rate | Unaffected by grant; claimed under merged scheme at standard rate |
The practical consequence of the change is that companies which received Innovate UK grants before April 2024 and were deterred from claiming because of the contamination effect should reassess their position. For accounting periods beginning from April 2024, the contamination issue is resolved. For earlier periods still within the two-year filing window, the old rules apply but a specialist assessment will establish whether any claim was available under the pre-2024 framework that was not pursued.
4. What "Subsidised Expenditure" Means Under the Merged Scheme
The merged scheme retains the fundamental principle that the same expenditure cannot attract both a government grant and R&D tax relief. This is sometimes called the subsidised expenditure rule or the ring-fencing rule. Understanding exactly how it applies determines how much of a grant project can be included in an R&D claim.
How the Ring-Fencing Rule Works
Only the portion of project costs directly funded by the Innovate UK grant is excluded from the R&D claim. The company's own contribution to the same project is fully eligible under the merged scheme, subject to the qualifying expenditure rules. If Innovate UK funds 60 per cent of a project's eligible costs and the company funds 40 per cent, the company's 40 per cent contribution (to the extent it meets qualifying criteria) is eligible for the 20 per cent R&D credit. The 60 per cent grant-funded portion is excluded. There is no contamination of the remaining costs.
In practice, establishing which costs were grant-funded and which were company-funded requires working through the grant agreement and the actual drawdown records. Innovate UK grant agreements specify eligible cost categories and the percentage of each cost covered by the grant. Where cost records are maintained by cost category and project, the separation is relatively straightforward. Where they are not, a specialist adviser can work through the grant documentation and expenditure records to reconstruct the split retrospectively.
One important nuance: Innovate UK grants typically cover eligible costs only. The grant does not cover ineligible costs, which may include certain overhead categories, VAT, or costs outside the specified project scope. Costs that were ineligible for grant funding may still qualify for R&D tax relief if they meet HMRC's criteria. The two eligibility frameworks are different and costs that fall outside one can fall inside the other.
5. UKRI Collaborative Research and Development Grants
Many Innovate UK grants are awarded as collaborative projects, where a consortium of companies and research organisations shares the project and the funding. Collaborative R&D grants have a more complex interaction with R&D tax credits because multiple parties are involved, each of which may have its own qualifying expenditure and its own R&D claim.
Each participating company in a collaborative project can claim R&D tax credits on its own company-funded qualifying expenditure. The grant funding received by each participant covers a portion of their costs; the rest is self-funded and eligible for relief. The fact that one consortium member has claimed relief on its costs does not affect another member's claim.
The subcontractor rules matter in collaborative projects. Where one consortium member pays another to conduct qualifying R&D, the paying company can include those costs as subcontractor expenditure at 65 per cent. The receiving company may also claim on its own costs. The 65 per cent rule is designed to prevent the same underlying staff or material cost appearing in full in two different claims.
Universities involved in collaborative grants occupy a different position. Universities do not claim R&D tax credits (they are not within the charge to UK corporation tax). Where a company pays a university as a subcontractor within a qualifying R&D project, the university subcontractor costs at 65 per cent are eligible in the company's claim without the concern about overlapping claims that applies to commercial subcontractors.
6. The Double-Claiming Opportunity
"A company with a £200,000 Innovate UK grant on a £500,000 project may still have £300,000 of qualifying expenditure eligible for R&D tax credits under the merged scheme."
The framing of "double-claiming" is sometimes treated as if it ought to be impermissible. It is not. It is the intended operation of two parallel government mechanisms designed to encourage R&D investment from different angles. Innovate UK grants reduce the financial risk of undertaking specific high-priority innovation projects. R&D tax credits reward the employment of staff and the incurring of costs in any qualifying R&D activity, regardless of whether those activities were grant-supported.
The combination of the two is particularly powerful for companies at the innovation frontier. A company awarded a competitive Innovate UK grant has demonstrated the quality of its R&D programme to an independent expert panel. Its qualifying R&D activity is well evidenced. Its cost records are already structured to meet grant reporting requirements. It is better positioned to prepare a high-quality R&D tax credit claim than most companies without grant history.
The opportunity also extends beyond the funded project. Innovate UK grant recipients are typically technology-intensive businesses with multiple qualifying R&D workstreams running simultaneously. The funded project may represent a fraction of the total qualifying activity. A comprehensive assessment should look at all R&D activity across the business, not just the grant project.
7. Common Mistakes Grant Recipients Make
Errors That Reduce or Eliminate the Claim
- Assuming the grant precludes all R&D relief. The most common and costly mistake. Grant recipients frequently assume, without checking, that the Innovate UK grant means they cannot claim R&D tax credits at all. The grant excludes only the grant-funded costs from the claim. The company-funded costs, and all R&D outside the funded project, remain fully eligible.
- Not separating grant-funded and company-funded costs. Where cost records do not distinguish between the two, establishing the eligible R&D claim requires additional reconstruction work. Companies that track costs by project and funding source from the outset avoid this problem entirely. For companies mid-project, it is worth establishing the cost-tracking discipline now rather than waiting until a claim is being prepared.
- Applying old rules to new accounting periods. The contamination effect that applied under the pre-April 2024 SME scheme no longer applies under the merged scheme. Companies that were told not to bother claiming because their Innovate UK grant would push them to RDEC should take fresh advice. The merged scheme applies equally to all companies and the old distinction has gone.
- Claiming only on the grant project. The grant project is usually the starting point for the R&D conversation. It is rarely the end. A specialist assessment will identify qualifying activity across the business, not just in the project that attracted Innovate UK funding.
- Missing the filing deadline on completed projects. Innovate UK projects have defined end dates. Where a project ended one or two years ago and no R&D claim was made, the window may be closing. The two-year filing deadline runs from the end of the relevant accounting period, not the end of the grant project.
8. Worked Example: £400,000 Project, £150,000 Innovate UK Grant
Worked Example: Grant Project R&D Claim Calculation
Company profile: 28-person software and hardware technology company. Received Innovate UK grant of £150,000 for a project developing sensor fusion technology for industrial automation applications. Total project cost: £400,000 over two accounting years.
Step 1: Separate grant-funded and company-funded costs
| Cost category | Total project cost | Grant-funded (37.5%) | Company-funded (62.5%) |
|---|---|---|---|
| Staff costs | £240,000 | £90,000 | £150,000 |
| Subcontractors (university partner) | £80,000 | £30,000 | £50,000 |
| Consumables and test components | £48,000 | £18,000 | £30,000 |
| Software licences | £32,000 | £12,000 | £20,000 |
| Total | £400,000 | £150,000 | £250,000 |
Step 2: Apply qualifying expenditure rules to company-funded costs
| Company-funded staff costs (fully qualifying) | £150,000 |
| University subcontractor costs at 65% | £32,500 |
| Consumables (directly used, fully qualifying) | £30,000 |
| Software licences (qualifying portion) | £20,000 |
| Total qualifying expenditure (grant project) | £232,500 |
Step 3: Add qualifying R&D outside the grant project
The same company also has two other qualifying R&D projects running concurrently, with total qualifying expenditure of £185,000. These are entirely unaffected by the Innovate UK grant.
| Qualifying expenditure from grant project | £232,500 |
| Qualifying expenditure from other R&D projects | £185,000 |
| Total qualifying expenditure | £417,500 |
Step 4: Calculate claim value under merged scheme
| R&D credit at 20% | £83,500 |
| Corporation tax on credit at 25% | (£20,875) |
| Net benefit (profitable company) | £62,625 |
Without the R&D tax credit claim, this company would have left £62,625 per year unclaimed. The Innovate UK grant reduced the company's expenditure on the funded project; the R&D tax credit then returns a proportion of the remaining company-funded expenditure and the separately qualifying R&D activity.
9. Other Grant Types: SBRI, KTP, and EIC
Innovate UK is the most well-known source of innovation grants in the UK but it is not the only one. Several other government-backed grant mechanisms have a similar interaction with R&D tax credits and the same principles broadly apply.
SBRI (Small Business Research Initiative). SBRI contracts are structured differently from standard grants: they are procurement contracts for the development of innovative solutions to public sector challenges. The SBRI contract revenue is income, not a grant. R&D costs incurred under an SBRI contract may still qualify for R&D tax credits, but the subsidised expenditure analysis is different and requires specialist advice. The company bears all the R&D costs and receives contract payments; it is not a grant-recipient in the conventional sense.
KTP (Knowledge Transfer Partnership). KTPs are a three-way partnership between a company, a university or research organisation, and Innovate UK. The KTP associate (typically a recent graduate) works embedded in the company on a specific knowledge transfer project. The government funds a significant proportion of the associate's salary and project costs. The company's own contribution to the KTP, including management time, can qualify for R&D tax credits where the KTP project involves qualifying R&D activity. The KTP structure is well suited to generating an R&D claim alongside the partnership.
EIC (European Innovation Council) and Horizon grants. UK companies can still participate in some European funding programmes following the UK's association with Horizon Europe from 2024. EIC grants and Horizon project funding from European sources interact with the UK R&D tax credit scheme in a similar way to Innovate UK grants: the grant-funded costs are excluded but the company's own contribution remains eligible. The specific grant terms and the classification of the funding will determine the precise treatment and specialist advice is recommended.
Catapult funding and collaborative programmes. Engagement with Catapult centres (such as the High Value Manufacturing Catapult, Connected Places Catapult, or Compound Semiconductor Applications Catapult) often involves cost-sharing on R&D projects. The company's own contribution to collaborative Catapult projects can qualify for R&D relief on the same basis as Innovate UK co-funded work.
Frequently Asked Questions
Under the merged RDEC scheme from April 2024, the old state aid contamination effect no longer applies. The grant-funded portion of your costs cannot be included in an R&D claim, but the company-funded portion can be claimed under the merged scheme at the standard rate. A specialist adviser will map your specific grant terms against the current rules.
Yes. Where you contributed your own funds to a project alongside Innovate UK grant funding, the self-funded portion of the qualifying costs can form the basis of an R&D tax credit claim under the merged scheme. This is one of the key reasons to track grant-funded and self-funded costs separately from the outset of a project.
Yes, within the two-year filing window. You can claim R&D tax credits for accounting periods ending up to two years ago. If the grant project spanned multiple accounting periods, you may be able to claim for qualifying self-funded costs in each open period. Check the filing deadline for each relevant accounting period.
Yes, and this is often where the larger claim lies. Many companies that have received Innovate UK grants are also conducting qualifying R&D outside the funded project. These activities are entirely unaffected by the grant and can be claimed under the standard rules. A specialist assessment will look at all your R&D activities, not just the grant-funded project.
KTP funding has a specific interaction with R&D tax credits. The company partner in a KTP can claim R&D tax credits on its own qualifying expenditure associated with the KTP project. The grant element received by the KTP itself is separate. A specialist adviser familiar with KTP structures will establish the eligible costs correctly.