Quick answer: Innovate UK grant interaction describes how receiving an Innovate UK grant, typically notified state aid, affects an R&D tax relief claim. Under the old SME scheme this blocked SME relief on the whole project; under the merged scheme from 1 April 2024, the grant-funded proportion is instead adjusted through the subsidised-expenditure rules.
What is Innovate UK grant interaction?
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 does HMRC define the interaction?
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.
What does Innovate UK grant interaction look like in practice?
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.
Worked example: merged scheme vs old SME-scheme outcome
Extending the £300,000-grant example above: under the pre-2024 SME scheme, notified state aid on part of the project would have blocked the enhanced SME deduction for the entire £1,000,000 project, forcing an RDEC-only claim worth roughly £150,000 (RDEC's old net benefit was approximately 15p per £1 of qualifying spend for a profitable company). Under the merged scheme, the same £1,000,000 qualifies for the 20% above-the-line credit - £200,000 pre-tax - with only the grant-funded portion adjusted through the subsidised-expenditure rules, not the whole project pushed onto the lower rate.
Which grants count as notified state aid?
Not every public grant is notified state aid - the distinction matters because it determines exactly how the subsidised expenditure rules apply. Innovate UK Smart Grants and most Horizon Europe funding are notified state aid; some regional and sector-specific grants are not. Companies relying on multiple funding sources for the same project should check each grant’s status individually against notified state aid before assuming the merged-scheme treatment applies uniformly, and can confirm overall eligibility with a free assessment. Companies planning to apply for Innovate UK funding should model both the grant terms and the merged-scheme credit together before accepting an offer, since the combined post-grant, post-credit cash position is what actually funds the next phase of development, not the headline grant amount in isolation.
Related terms
- Grant Funding (R&D Claim)
- Notified State Aid
- Subsidised Expenditure
- Exempt Foreign Permanent Establishment
Frequently asked questions
No - the subsidised-expenditure rules reduce the qualifying expenditure by the grant-funded proportion of the specific costs, not by the cash amount of the grant itself, so the exact reduction depends on how the grant maps onto the project’s cost categories.
No, not any more. Under the old SME scheme, notified state aid from Innovate UK blocked the SME claim on the entire project, forcing an RDEC-only claim. Under the merged scheme from 1 April 2024, the claim proceeds with the subsidised-expenditure rules reducing the qualifying amount for the grant-funded portion instead.
Most Innovate UK Smart Grants and most Horizon Europe funding are notified state aid, but some regional and sector-specific grants are not. Companies relying on multiple funding sources for the same project should check each grant’s status individually.
Yes. Companies planning to apply for Innovate UK funding should model both the grant terms and the merged-scheme credit together before accepting an offer, since the combined post-grant, post-credit cash position is what funds the next phase of development, not the headline grant amount alone.