Can I claim R&D tax relief if I've had a grant?

The position from 1 April 2024

Take the grant and claim the relief. There is no reduction, no allocation exercise and no split claim. An Innovate UK award, a Horizon Europe contribution, a regional growth grant, a match-funded consortium project — none of them affects the qualifying expenditure figure.

Three things follow that are worth stating plainly, because the old rules trained people out of them:

• Sequencing no longer matters. There is no longer any benefit in delaying a grant application to protect a claim, or in structuring a grant so that it lands against non-R&D costs. That planning is obsolete for periods beginning on or after 1 April 2024.
• A grant no longer pushes you onto a different scheme. The route that took grant-funded SME expenditure into RDEC existed because the SME scheme excluded it. The merged scheme is one scheme; there is nothing to be pushed onto.
• The grant is still income. A grant meeting revenue costs is a taxable trading receipt in the period it is recognised. Relief on the expenditure and tax on the receipt sit alongside each other.

The one restriction that survives: Northern Ireland

A company with its registered office in Northern Ireland that claims ERIS, and that trades in goods or carries on relevant electricity activities, is subject to a cap on the additional benefit ERIS gives it over what it would have received under the merged scheme. The cap is a three-year cumulative de minimis limit of €300,000, reduced to €50,000 for agriculture and €30,000 for aquaculture and fisheries, and it applies across the single undertaking — parents, subsidiaries and linked enterprises together. A company with no trade in goods and no electricity activities can notify HMRC to opt out and be treated under the standard UK ERIS rules.

Two consequences: other subsidies the company has received count towards the same de minimis ceiling, so a grant can in principle displace part of the ERIS benefit; and exceeding the limit withdraws the benefit entirely rather than capping it at the ceiling. If you are Northern Ireland registered, R&D intensive, loss-making and grant-funded, this needs computing before the claim is filed, not after.

The position for accounting periods beginning before 1 April 2024

Under the legacy SME scheme, grant funding was tested through the subsidised expenditure rules, and the answer depended on the type of grant.

A notified State aid took the whole project out of SME relief. Not the funded part — everything spent on that project, however small the award. Notified State aid is aid that was notified to and approved by the European Commission. Repaying the grant afterwards did not undo it.

Any other grant or subsidy restricted the claim pound for pound. Expenditure was subsidised to the extent of the funding, so an SME with a £500,000 project and a £100,000 grant kept £400,000 in the SME scheme.

De minimis aid restricted only the costs it actually funded, leaving the rest of the project claimable under SME relief.

The restricted amount went to RDEC. Expenditure excluded from the SME scheme only because it was subsidised could be claimed under RDEC instead, with a payable credit available. That split claim characterises grant-funded projects in those years: SME relief on the unfunded balance, RDEC on the funded part.

One point is easy to miss when looking back at pre-2024 years. After the UK left the EU, government grants became State aid only in very limited circumstances — broadly, where the Windsor Framework is engaged, which requires a trade in manufactured goods or the electricity market, a subsidy above £10m (£3m for an SME), a Northern Ireland market share above 10% and an economic benefit passing from Great Britain to Northern Ireland. So a grant awarded to a Great Britain company in, say, 2022 was very unlikely to be a notified State aid, and the whole-project taint that applied to earlier grants often did not apply to it. Claims prepared on the assumption that any government grant was State aid may have been understated.