Quick answer: Grant funding is government or public-body financial support, such as Innovate UK or Horizon Europe funding, whose receipt affects an R&D tax relief claim. Under the old SME scheme, notified state aid grants blocked SME relief on the whole project; under the merged scheme from 1 April 2024, grants no longer displace the credit outright but reduce the qualifying amount through subsidised-expenditure rules.
What is grant funding in the R&D claim context?
Grant funding refers to financial support from government bodies such as Innovate UK, Horizon Europe or the European Regional Development Fund. Under the old SME scheme, the receipt of notified state aid grants blocked SME R&D relief on the entire project, forcing the company to claim under RDEC instead. Under the merged scheme from 1 April 2024, the treatment is simpler: grants generally do not displace the merged scheme credit, but subsidised-expenditure rules still reduce the qualifying amount in some cases.
How does HMRC define the grant-funding interaction?
HMRC guidance on grant interaction is at CIRD81670 for the old rules and CIRD90300 for the merged scheme. The distinction between notified state aid and other grants is covered at CIRD81680. Specific Innovate UK treatment is illustrated in HMRC's case studies referenced at CIRD81660.
What does grant funding look like in practice?
An AI company receives an Innovate UK Smart Grant of £200,000 towards a £500,000 R&D project. Under the merged scheme from 1 April 2024, the company claims the 20% above-the-line credit on the full qualifying expenditure, with the grant adjusted through the subsidised-expenditure mechanism rather than blocking the claim entirely, subject to review of the grant terms. Check the free eligibility calculator to see how a specific grant might affect your net claim value.
Worked example: old scheme vs merged-scheme outcome
Extending the £200,000-grant example: under the pre-April-2024 SME scheme, a £200,000 notified state aid grant would have blocked the enhanced SME deduction on the entire £500,000 project, forcing an RDEC-only claim worth roughly £75,000 (RDEC's old net benefit was approximately 15p per £1 for a profitable company). Under the merged scheme, the full £500,000 qualifies for the 20% above-the-line credit - £100,000 pre-tax - with only the grant-funded proportion adjusted, not the whole project displaced onto the lower rate.
How do grants interact with subsidised expenditure and subcontracting?
Grant funding is one of several routes into the subsidised expenditure rules, alongside subsidised contracts and connected-party arrangements. Companies combining Innovate UK funding with private investment should map each funding source against the specific cost lines it supports - see Innovate UK grant interaction for the mechanics - rather than assuming the grant simply discounts the whole claim proportionally. Companies that receive a grant partway through an ongoing project should also revisit the apportionment for the period before the grant was awarded, since subsidised-expenditure rules generally apply only from the point the funding relationship existed, not retrospectively to spend already incurred.
Related terms
Frequently asked questions
Yes - the Additional Information Form requires disclosure of any grant or subsidy relevant to the project, and HMRC cross-references this against the subsidised-expenditure calculation shown in the claim, so understating grant funding is a common enquiry trigger.
Under the old SME scheme, receipt of a notified state aid grant blocked SME R&D relief on the entire project, forcing an RDEC-only claim. Under the merged scheme from 1 April 2024, grants generally no longer block the claim; instead, subsidised-expenditure rules reduce the qualifying amount for the grant-funded portion.
Grants from bodies such as Innovate UK, Horizon Europe or the European Regional Development Fund are the most common. Most Innovate UK Smart Grants are classed as notified state aid, which is the classification that historically triggered the SME-scheme restriction.
Yes. Companies that receive a grant partway through an ongoing project should revisit the apportionment for the period before the grant was awarded, since subsidised-expenditure rules generally apply only from the point the funding relationship existed, not retrospectively to spend already incurred.