Definition
Subsidised expenditure is R&D expenditure that has been met, directly or indirectly, by a grant, subsidy or payment from a third party. Under the old SME scheme, subsidised expenditure was excluded from the SME claim but was claimable under RDEC. Under the merged scheme from 1 April 2024, the subsidised-expenditure mechanism is simplified: subsidies no longer displace the main relief but reduce the qualifying amount by the amount of the subsidy. The rule applies alongside the separate subcontractor rules.
How HMRC defines it
HMRC guidance on subsidised expenditure is at CIRD81670 for the old rules and CIRD90300 for the merged scheme. The legislation is at sections 1138 and 1138B of the Corporation Tax Act 2009. HMRC's published examples distinguish project-linked subsidies from general grants such as employment incentives, which do not count as subsidising specific R&D.
Practical example
A company spends £500,000 on qualifying R&D of which £150,000 is funded by an Innovate UK grant. Under the merged scheme, the company claims the 20% credit on £350,000 of net qualifying expenditure, treating the £150,000 subsidy as reducing the qualifying amount in the period.