R&D Tax Credits under the Merged Scheme apply to qualifying expenditure in accounting periods starting on or after 1 April 2024. The standard credit rate is 20% above-the-line. Innovate UK grants (formerly Technology Strategy Board competitions) are competitive cash awards made to companies undertaking specific innovation projects. The two routes to public funding are structurally different and interact in ways that require careful accounting.
The core difference
R&D Tax Credits are a retrospective relief. After your accounting period ends, you calculate qualifying R&D expenditure, complete the Additional Information Form, and include the relief on your CT600. HMRC processes the claim and either reduces your corporation tax liability or, for loss-making companies, issues a cash payment. The timing is typically six to twelve months after the qualifying expenditure is incurred.
Innovate UK grants are cash upfront. You apply before the project starts, receive a decision, and if successful draw down funding against approved project costs during the project. The grant covers a defined percentage of eligible project costs, typically 25% to 100% depending on company size and competition type, paid against milestone claims submitted quarterly or at completion.
This structural difference has practical implications. A grant helps you fund the work. A tax credit reimburses you after the work is done. For a company with a cash-flow constraint, combining both is attractive precisely because they operate at different points in the project lifecycle.
At a glance
| Criterion | R&D Tax Credits (Merged Scheme) | Innovate UK Grants |
|---|---|---|
| Timing | Retrospective: claimed after accounting period ends via CT600 | Prospective: applied for before project; cash drawn during project |
| Application | No application; self-assessed relief filed with corporation tax | Competitive application assessed by Innovate UK against published criteria |
| Certainty | Self-assessed subject to HMRC compliance review; no pre-approval | Awarded before project starts; terms fixed in grant agreement |
| Rate | 20% of qualifying expenditure above-the-line (27% ERIS) | Varies: 25% to 100% of eligible project costs depending on competition |
| Qualifying basis | Broad qualifying expenditure categories across the period | Specific eligible costs defined in grant agreement; project-scoped |
| Subsidy interaction | Grant-covered expenditure may be excluded from qualifying spend | Grant is direct subsidy; triggers subsidised expenditure rules |
| Fit for whom | Any qualifying UK company in any year with R&D expenditure | Companies with projects that match Innovate UK competition criteria |
CIRD81000 and the subsidised expenditure rules
HMRC's guidance at CIRD81000 and surrounding sections sets out how subsidised expenditure affects R&D relief. Under the old SME scheme (for periods before April 2024), expenditure that was subsidised by a notified State aid grant could not be claimed under the enhanced SME R&D deduction. This was a hard exclusion: grant-funded costs were ring-fenced out of the SME enhanced rate claim entirely.
Under the Merged Scheme from April 2024, the position changed. The 20% above-the-line credit under the Merged Scheme can, in principle, apply to expenditure that is not directly covered by the grant. Expenditure that is directly covered by grant funding is still excluded from the qualifying R&D expenditure calculation, but the remaining qualifying spend in the period can still attract the 20% credit.
A concrete example: a manufacturing SME receives an Innovate UK grant of £200,000 covering 50% of a £400,000 approved project budget. The £200,000 of grant-covered costs is excluded from qualifying R&D expenditure for the Merged Scheme credit. The remaining £200,000 of the approved project costs and any other qualifying R&D expenditure in the period outside the grant scope can still qualify for the 20% credit. Get specialist advice on the apportionment method, because HMRC expects a clear and defensible calculation.
What Innovate UK grants fund
Innovate UK runs competitive grant programmes through UK Research and Innovation (UKRI). Grant competitions are published on the Innovate UK website and typically specify: the technology or sector focus, eligible company types, eligible cost categories, the grant rate (the percentage of eligible costs that Innovate UK will fund), and the project duration and scale.
Common competition types include: Smart grants (open to any sector, typically 25 to 70% of eligible costs), sector-specific competitions (e.g. Net Zero, advanced manufacturing), and Innovate UK EDGE accelerator funding. Match-funding requirements mean the company must contribute the balance of eligible costs from its own resources.
Eligible costs under an Innovate UK grant are defined in the grant agreement and typically include: staff costs at specified rates, subcontractor costs (often at 30% of total eligible costs), equipment depreciation, overheads (at a flat rate), and specific materials. These eligible cost categories overlap substantially with, but are not identical to, HMRC's qualifying expenditure categories for R&D Tax Credits. The grant eligible costs and the R&D qualifying costs need to be reconciled carefully to identify the portion that can still feed an R&D claim.
Sequencing: how to get both
The practical approach for a company that has received or is applying for an Innovate UK grant and also has qualifying R&D expenditure:
- Map the grant scope. Identify which specific costs are directly covered by the grant and at what rate. Get this from your grant agreement, not from a rough estimate.
- Separate grant-covered from non-grant-covered qualifying spend. Expenditure directly covered by the grant is excluded from the R&D claim. Qualifying R&D expenditure that falls outside the grant scope is not affected.
- Assess the remaining qualifying expenditure. Staff costs, subcontractor costs, consumables, cloud, and software costs that are not grant-covered and that qualify under HMRC's CIRD criteria can still be included in the R&D claim.
- Complete the Additional Information Form and CT600 entry. The AIF must describe the qualifying R&D projects. Where a project is partly grant-funded, describe clearly the scope of qualifying work beyond the grant-funded component.
This is not a calculation you should leave to a generalist accountant. The intersection of grant eligible costs and R&D qualifying costs requires someone who understands both frameworks. An R&D specialist introduced by Uplift Tax can work alongside your grant management process to ensure neither funding stream is compromised by the other.
Common mistakes
Mistake 1: Excluding all R&D costs in a grant year from the R&D claim. Some companies and their accountants assume that receiving a grant in a period means no R&D Tax Credit claim is possible for that period. Under the Merged Scheme, this is wrong. Only the expenditure directly covered by the grant is excluded.
Mistake 2: Double-counting. Including grant-covered costs in the R&D qualifying expenditure calculation is an error that will attract HMRC scrutiny. The AIF must not include expenditure that was directly funded by a subsidy.
Mistake 3: Assuming all grant income is equivalent. Not all grants interact with R&D claims in the same way. Whether the grant is a notified State aid (relevant under the old SME scheme) or falls under UK subsidy control (relevant post-Brexit under the Merged Scheme) affects the analysis. For periods from April 2024 onward, the Merged Scheme rules apply and the old EU State aid framework is not directly relevant, but the specific terms of each grant agreement still matter.
When a grant is the better route
An Innovate UK grant is worth pursuing when:
- Your project aligns with a published competition brief and you have the time and capacity to prepare a competitive application.
- You have a cash-flow constraint that requires funding during the project, not reimbursement after it.
- The project involves collaboration with a university or other research body, where Innovate UK competitions are often structured to reward collaborative approaches.
R&D Tax Credits are worth pursuing in every accounting period where you have qualifying expenditure, regardless of whether you have a grant. The two are not substitutes; they are complementary funding mechanisms with different timing and eligibility profiles. See the full qualifying expenditure guide for what qualifies under the Merged Scheme.
For more on how R&D Tax Credits interact with Capital Allowances in the same period, read our comparison of R&D Tax Credits vs Capital Allowances. To run your own numbers, use the eligibility checker.