Many UK tech and product founders win both grant funding and R&D tax relief, and for years the two pulled against each other: a grant could quietly shrink the R&D claim on the work it funded. Under the merged scheme that restriction is gone. For accounting periods beginning on or after 1 April 2024, grant funding no longer reduces the qualifying R&D expenditure you can claim on that spend. This page explains the change, why it matters most for grant-heavy loss-making startups, and the one thing you still cannot do.
Does a grant reduce your R&D relief claim?
Under the merged scheme, for accounting periods beginning on or after 1 April 2024, the answer is now a clear no. The merged R&D scheme removed the subsidised-expenditure restriction entirely. Grant funding, subsidies and customer contributions no longer cut down the qualifying R&D expenditure the way they did under the old SME scheme. A grant-funded qualifying project can be claimed in full, with one limit that has not changed: you cannot claim the same cost twice, and the grant money itself is not a claimable R&D cost.
What changed: the old subsidised-expenditure trap
Before 1 April 2024, the SME R&D scheme carried a subsidised-expenditure restriction. If a grant funded part of a qualifying project, that grant-funded spend was blocked from the more generous enhanced SME relief and pushed onto the Research and Development Expenditure Credit (RDEC) instead, which gave a materially smaller benefit. Winning an Innovate UK grant could therefore reduce the tax value of the very R&D it paid for. This forced founders into awkward modelling of whether a grant was worth taking at all.
The merged scheme scrapped that restriction. For periods beginning on or after 1 April 2024, subsidised expenditure is treated the same as self-funded spend for the R&D claim. Source: HMRC guidance on corporation tax R&D relief. The grant-versus-relief trade-off that dominated pre-2024 planning has largely dissolved.
The merged scheme, and why this matters most for ERIS
For accounting periods beginning on or after 1 April 2024, the UK has one main R&D regime: the merged scheme, giving a 20% above-the-line taxable expenditure credit. It replaces both the old SME super-deduction and the separate RDEC for those periods.
The bigger prize sits with loss-making startups. A loss-making SME whose qualifying R&D spend is at least 30% of its total expenditure can access Enhanced R&D Intensive Support (ERIS): an 86% additional deduction plus a payable credit at 14.5%. Under the old rules, a grant-heavy project would have had its subsidised spend forced onto RDEC, both shrinking the claim and often dragging the company below routes it should have qualified for. Now that grant funding no longer reduces the qualifying spend, a heavily grant-funded, loss-making, R&D-intensive SME can count that full spend toward both the 30% intensity test and the enhanced deduction, and can reach ERIS where the old rules would have kept it on RDEC. For a cash-burning startup, that is the difference between a modest credit and a substantial cash repayment. The ERIS guide works through the 30% test and the payable credit in full.
Scenarios under the merged scheme
| Scenario | Treatment under the merged scheme |
|---|---|
| Project is fully self-funded (no grant) | If the work seeks an advance in science or technology and resolves technological uncertainty, it qualifies under the merged scheme (20% credit), or ERIS if the company is loss-making and meets the 30% R&D-intensity test. |
| Grant part-funds the project (match-funded) | Both the grant-funded and self-funded qualifying spend can be claimed. The subsidised-expenditure restriction no longer reduces the grant-funded portion. The whole qualifying project follows the merged scheme (or ERIS if the tests are met). |
| Grant fully funds a discrete work package | The fully grant-funded work package can still be claimed, provided it is qualifying R&D. There is no longer a separate, worse route for grant-funded spend. Keep records by work package so the qualifying spend is clearly evidenced. |
| Grant work is routine development, not R&D | No qualifying R&D exists regardless of funding, so no relief can be claimed on this spend. The grant is irrelevant here; the work simply fails the R&D test. |
What a grant still cannot do
Two limits survive the change. First, the work must pass the qualifying R&D test on its own merits: qualifying R&D must seek an advance in science or technology and resolve scientific or technological uncertainty. Routine software development and incremental product updates do not qualify, however they are funded. Second, you cannot claim the same cost twice: grant income is not itself a claimable R&D cost, and you claim relief on the qualifying expenditure, not on the grant.
A grant from an innovation body does not itself confirm that the funded work qualifies for R&D tax relief. The grant body applies its own assessment criteria, which are not the same as HMRC's. It is possible to win a competitive innovation grant for work that does not meet the HMRC qualifying test. It is equally possible for unfunded work to qualify while a grant-funded work package on the same project does not.
Treating grant funding as a proxy for R&D qualification is one of the most common errors in startup R&D claims. The qualifying test applies independently of the funding decision.
Practical steps: before you claim
The interaction is far simpler than it used to be, but a few steps still matter.
- Identify the qualifying R&D, funded or not. Grant funding no longer changes whether qualifying spend can be claimed, so the work now is scoping which activity genuinely meets the R&D test, not policing which costs a grant touched.
- Keep grant and R&D records aligned. Maintain records that identify the qualifying spend and evidence it. You are not carving out grant-funded costs any more, but clean records still support the claim and any HMRC enquiry, and they stop the same cost being counted twice.
- Notify HMRC of your claim intent within the 6-month window. First-time claimants (and companies that have not claimed in the prior three years) must notify HMRC within 6 months of the end of the accounting period. This applies regardless of whether a grant is involved, and missing the window invalidates the claim. See the claim notification guide.
- Submit the Additional Information Form before the CT600. The Additional Information Form (AIF) is mandatory before the R&D claim on the CT600. Claims filed without a valid AIF are removed by HMRC.
What to do next
If you turned down or under-modelled a grant in the past because it would have cut your R&D claim, that calculation has changed under the merged scheme. A grant-funded qualifying project can now be claimed in full, and a loss-making R&D-intensive SME may reach ERIS on spend the old rules would have blocked.
The R&D claims service covers qualifying-work assessment, AIF preparation and CT600 submission. For R&D-intensive loss-making companies, the ERIS guide covers the 30% intensity test and the payable credit that grant-heavy startups can now reach. The software R&D eligibility guide helps identify which parts of a technology project generate qualifying costs in the first place.
Use the R&D relief estimator to model the credit value on the qualifying spend your company expects to claim.