4 August 2025
5 min read
Here we explain how different funding sources interact with R&D claims, what restrictions apply, and what companies need to consider when planning their funding strategy.
Claiming R&D tax relief can impact on other sources of funding, particularly grants and subsidies, due to the rules around state aid, funding interactions, and scheme eligibility. These interactions can affect the type or amount of R&D tax relief a company can claim and its ability to access other funding.
We look at some of the key areas below.
Historically, receiving certain grants classified as “notified state aid” (e.g., some EU-funded grants pre-Brexit) could disqualify SMEs from claiming under the SME R&D relief scheme for the same project, pushing them to the the ordinary 20 percent merged scheme credit. Post-Brexit, the UK’s Subsidy Control Act 2022 replaced EU state aid rules, but similar principles apply:
→ If a project receives a grant classified as a subsidy (e.g., Innovate UK grants), the R&D tax relief claim for that project may be restricted to the merged scheme’s 20% taxable credit (net benefit 15% at 25% corporation tax) instead of the Enhanced R&D Intensive Scheme (ERIS) for R&D-intensive SMEs (186% super-deduction, 14.5% cash credit).
❌ Costs covered by the grant are typically excluded from R&D tax relief to prevent “double-dipping” (claiming multiple public funds for the same expenditure).
→ Note – Northern Irish projects may still be caught by EU State Aid rules due to their unique position under the Windsor Framework.
Some grants, such as de minimis or non-notified funding, may not affect R&D tax relief eligibility, allowing companies to claim under ERIS or the merged scheme for the same project, provided costs are not double-funded.
Before applying for grants, you should check your subsidy status with the funding body (e.g., Innovate UK) to understand implications for R&D tax relief. Companies must apportion costs to ensure only non-grant-funded expenditure is claimed.
Claiming R&D tax relief does not typically disqualify a company from applying for other funding sources, such as Innovate UK grants, UKRI funding, or private investment (e.g., venture capital, angel funding). However, funders may scrutinise a company’s financial position, and R&D tax credits (especially cash credits) can improve cash flow, making the company more attractive for investment.
Demonstrating a successful R&D tax relief claim can signal to funding bodies that a company is engaged in innovative, eligible R&D, potentially strengthening grant applications. However, funders may require transparency about tax relief claims to ensure compliance with subsidy control rules.
To qualify for ERIS (186% super-deduction, 14.5% cash credit), loss-making SMEs must have R&D expenditure ≥30% of total expenditure. Receiving large grants or other funding for non-R&D activities (e.g., marketing, operations) could dilute R&D intensity, potentially disqualifying the company from ERIS and limiting them to the merged scheme’s 20% credit.
Careful financial planning and cost allocation can help maintain R&D intensity. For example, ring-fencing R&D costs separately from grant-funded operational costs ensures accurate reporting.
For loss-making companies, R&D tax relief cash credits (subject to the PAYE/NIC cap of £20,000 + 300% of PAYE/NIC liabilities) can provide critical liquidity, enhancing eligibility for other funding by demonstrating financial stability.
Venture capital or private investors may view R&D tax credits as a positive signal of innovation and government support, potentially increasing access to equity funding. However, investors may require clarity on how tax credits are used to avoid conflicts with their funding terms.
Companies claiming R&D tax relief can also benefit from the Patent Box, which offers a reduced 10% corporation tax rate on profits from patented inventions. R&D tax relief can support the development phase of patentable innovations, and the two incentives are complementary, with no direct impact on eligibility.
R&D tax relief does not typically affect eligibility for other UK tax incentives, such as Capital Allowances or Enterprise Investment Scheme (EIS) relief, provided the company meets each scheme’s criteria. However, careful cost allocation is needed to avoid claiming the same expenditure under multiple schemes.
To avoid conflicts with other funding, maintain clear records separating grant-funded costs from those claimed under R&D tax relief. HMRC requires transparency, and errors can lead to enquiries or penalties.
The mandatory Additional Information Form (AIF, since August 2023) must detail R&D projects and costs, including any grant funding, to ensure compliance with subsidy rules. Robust documentation (e.g., project plans, cost breakdowns) is critical given HMRC’s increased scrutiny.
When applying for grants or investment, consider how they affect R&D tax relief eligibility. For example, prioritising non-subsidy grants or funding non-R&D activities can preserve access to ERIS for high-intensity SMEs.
If you have any questions about the interactions between tax relief and other funding, or ensuring compliance with subsidy control rules, please get in touch with us, and a representative will get back to you to discuss your unique needs and explain how we can assist.