Is my R&D expenditure subsidised?

The position from 1 April 2024

There is nothing to test. Neither the merged scheme nor ERIS contains a subsidised expenditure restriction, and HMRC’s guidance on ERIS says so in terms. A grant, a contribution from a customer, a payment from a group company or funding from any other source leaves your qualifying expenditure exactly where it was.

Two things still bite, and they are what people are usually reaching for when they ask this question:

• Who is entitled to claim where the work was done under contract for someone else. That is a different rule with a different test, and it is dealt with in Who claims the R&D relief when the work is done for someone else?.
• The tax treatment of the money itself. A grant or a contribution towards revenue costs is normally a taxable trading receipt. Not claiming it against your R&D expenditure does not make it tax-free.

What “subsidised” meant before 1 April 2024

Under the legacy SME scheme, expenditure was subsidised in three situations:

1. Notified State aid. Where a project received any funding that was a notified State aid, no expenditure on that project could qualify for SME relief — all of it, not just the funded part.
2. A grant or subsidy. Where the expenditure was met by a grant or subsidy that was not notified State aid, it was subsidised to the extent of that funding, pound for pound.
3. Otherwise met by another person. Where the expenditure was otherwise met, directly or indirectly, by a person other than the company.

Where funding was not given for identified expenditure, it was allocated according to the underlying facts rather than by a formula.

The third limb is where the arguments happened, because on a wide reading almost every company is paid by somebody.

Being paid by a customer is not a subsidy

It was HMRC’s position for several years that where a company did R&D in the course of delivering a commercial contract, the customer’s payments met the R&D expenditure and it was therefore subsidised under the third limb. The tribunal has rejected that three times.

In Quinn (London) Ltd v HMRC [2021] UKFTT 437 (TC) the tribunal held that the third limb is a sweep-up provision, catching expenditure met in a manner similar to a State aid or a grant. What it requires is a clear link between the funding and the specific expenditure. A price agreed for a specified piece of work is not that.

Collins Construction Ltd v HMRC [2024] UKFTT 951 (TC) and Stage One Creative Services Ltd v HMRC [2024] UKFTT 1059 (TC) followed it, on facts that will be familiar to anyone who has run a fixed-price contract. The customers paid an agreed sum for specified works. No contract provided for reimbursement of any R&D cost. The companies priced their estimated development work into the quotation and absorbed the overruns when it went badly. On those facts the expenditure was not subsidised.

HMRC did not appeal either decision, and its published guidance now says that a clear and direct link between the funding and the R&D expenditure is required, and that payments under contracts where R&D was not specifically contracted do not subsidise it.

So, for a legacy period still in point, the things that did not subsidise expenditure include:

• revenue from selling the product the R&D produced;
• commercial borrowing and investment;
• payment of a contract price for a deliverable, where nothing in the contract funded the R&D specifically;
• money the company earned and chose to spend on development.

And the things that did:

• a grant or award given towards the R&D, where the company gave no commercial return for it;
• funds with a clear link to identified R&D costs, including where they reached the company through a connected party;
• a customer’s contribution expressed as a contribution to development costs rather than as part of the price.

The RDEC route for expenditure that was subsidised

Where a legacy-period SME’s expenditure was excluded from the SME scheme only because it was subsidised, the company could claim the same expenditure under RDEC instead — including a payable credit. That is why a pre-April-2024 grant-funded project frequently produced a split claim: the unfunded part under the SME scheme at the enhanced rate, the funded part under RDEC at the lower rate.