Definition
Innovate UK grant interaction covers the rules that determine the R&D tax relief available where a company receives funding from Innovate UK. Most Innovate UK grants are notified state aid under EU and retained-UK subsidy rules. Under the old SME scheme, this barred SME R&D relief on the whole project, forcing the company into the RDEC route. Under the merged scheme from 1 April 2024, Innovate UK grants no longer block the main relief; instead, subsidised-expenditure rules reduce the qualifying amount by the proportion that is funded.
How HMRC defines it
HMRC guidance on grant interaction is at CIRD81670 and CIRD81680 for the old rules and at CIRD90300 for the merged scheme. Case-specific examples covering Innovate UK funding are in HMRC's published enquiry updates and Guidelines for Compliance GfC3.
Practical example
A health-tech company receives a £300,000 Innovate UK grant towards a £1,000,000 R&D project. Under the merged scheme, the company claims the 20% credit on the qualifying expenditure, with the portion funded by the grant reduced through the subsidised-expenditure rules. The overall outcome is materially better than under the pre-2024 regime, where the grant would have displaced the SME claim entirely.