R&D tax relief and grant funding: what has changed and why it matters

Claiming Research and Development (R&D) tax relief on grant-funded projects has become more straightforward and, in many cases, more valuable.

Historically, receiving grant funding could complicate an R&D claim. Many businesses, particularly those supported by grants such as Innovate UK, found that access to the more generous SME relief was restricted. This often meant splitting a claim and applying the less favourable Research and Development Expenditure Credit (RDEC) scheme to the grant-funded element.

That position has now changed.

Under the previous SME regime, notified state aid rules created a clear divide. If a project received grant funding, the associated R&D spend could be excluded from SME relief and instead fall into the RDEC regime.

This added complexity and, in some cases, reduced the overall benefit of claiming.

The increase in the RDEC rate from 10% to 15% for expenditure incurred from 1 April 2023 improved the position. However, the more significant change came with the introduction of the merged RDEC scheme and the Enhanced R&D Intensive Support (ERIS) regime.

For accounting periods beginning on or after 1 April 2024, the UK has moved to a new, merged RDEC system which is no longer treated as notified state aid.

This removes one of the main barriers that previously applied to grant-funded projects.

In practical terms, this means that where an R&D project is partly funded by a grant, companies are no longer automatically pushed into a less favourable treatment purely because of that funding. The need to split claims between different regimes is reduced, making the process more straightforward and more consistent.

The reforms also extend what can be included within a claim.

Companies are now able to include a wider range of costs, including payments to UK-based subcontractors. This is particularly relevant for businesses that rely on external expertise to deliver elements of their R&D activity.

For many, this change increases the amount of qualifying expenditure and, as a result, the value of the claim.

For loss-making SMEs, there is an additional opportunity through the Enhanced R&D Intensive Support (ERIS) regime.

Where a company spends 30% or more of its total expenditure on R&D, it may qualify for an enhanced rate of relief. In these cases, the benefit can be worth up to 27% of qualifying R&D expenditure.

Importantly, this can still apply where a project is partly grant funded.

This represents a significant improvement on the previous position and provides meaningful support for businesses investing heavily in innovation.

However, businesses receiving grant funding, particularly from Innovate UK, should not overlook the wider tax and funding implications. While the interaction with R&D tax relief has become simpler, Innovate UK grants may still be classified as State Aid for other purposes, which can affect access to certain reliefs and funding programmes.

The changes simplify the interaction between grant funding and R&D tax relief, while also increasing the potential value of a claim.

For businesses undertaking R&D, particularly those receiving grant support, it is now worth revisiting how claims are structured. Projects that may previously have been treated conservatively could now fall within a more favourable framework.

As with any R&D claim, the detail matters. Eligibility still depends on the nature of the work being undertaken and how costs are incurred and recorded. However, the overall direction of travel is towards a more accessible and supportive system.

If you are undertaking R&D activity or receiving grant funding for innovation projects, it is important to understand how these changes apply to you.

We work closely with businesses to assess eligibility, structure claims correctly, and ensure that available relief is fully utilised. Where Innovate UK or other grant funding is received, we consider the implications of State Aid status, including potential impacts on Venture Capital funding and State Aid limits, as part of a wider review of your funding and tax position.

If you would like to discuss your position, get in touch today.