Quick answer: Receiving an Innovate UK grant does not stop you claiming R&D tax credits. Under the merged scheme (accounting periods from 1 April 2024), grant funding no longer excludes costs from a claim: both grant-funded and company-funded costs may qualify for the 20% credit. Most grant recipients who have not claimed are leaving a real tax benefit unclaimed.
1. Can You Claim Both an Innovate UK Grant and R&D Tax Credits?
Direct Answer
Receiving an Innovate UK grant does not prevent you from claiming R&D tax credits. The two mechanisms are separate, administered by different government bodies, and designed to work alongside one another. You cannot claim on the same costs twice, but for accounting periods beginning on or after 1 April 2024, grant funding no longer excludes any part of a project from a claim under the merged scheme: both the grant-funded and company-funded portions of a grant project, plus all R&D activity outside the grant project, can form the basis of an R&D tax credit claim, subject to the normal qualifying-expenditure rules. Most Innovate UK grant recipients who have not claimed R&D tax credits are leaving a material tax benefit unclaimed. Use our free eligibility calculator to estimate what your project costs could be worth.
Companies that have won competitive Innovate UK funding have, by definition, passed a rigorous assessment of their R&D credentials. They are, almost without exception, conducting qualifying R&D activity. They are also among the best-documented R&D performers in the UK: Innovate UK requires detailed technical project plans, milestone reporting, and cost records as conditions of grant funding. The documentation that satisfies Innovate UK's requirements is largely the same documentation that supports a robust R&D tax credit claim.
The question is not whether you qualify. The question is how to calculate your eligible costs correctly under the rules that apply to grant-funded projects, and whether your R&D activity beyond the funded project has also been captured.
2. How Innovate UK Grants Work
Innovate UK is part of UK Research and Innovation (UKRI), the body that oversees publicly funded research and innovation in the UK. It awards grants to businesses to develop and demonstrate innovative technologies, typically as part of a specific competition aligned to a strategic priority area.
Grants are awarded as a proportion of total project costs, not as a full funding of the project. The grant covers a specified percentage of eligible project costs, which varies by scheme and company size. SMEs typically receive between 60 and 70 per cent of eligible costs from the grant, with the remaining 30 to 40 per cent contributed by the company itself. Large companies receive a lower grant proportion, often 50 per cent or less.
The grant agreement specifies which cost categories are eligible: typically staff costs, subcontractor costs, consumables, travel, and overheads up to a capped percentage. The company is required to co-fund the project, meaning it must contribute genuine additional resource rather than simply treating the grant as full project funding.
It is the co-funding requirement that creates the R&D tax credit opportunity. The costs that the company funds from its own resources, on a project that meets the qualifying criteria, are eligible for R&D tax relief. The grant-funded portion is not. The distinction between these two pools of expenditure is the foundation of the combined claim strategy.
3. The Old Rules vs the New Rules
The interaction between Innovate UK grants and R&D tax credits changed materially from April 2024, when the SME-scheme rule that excluded grant-funded costs from a claim, sometimes called the ring-fencing rule, was not carried forward into the merged scheme. Understanding the change matters because it affects both current claims and retrospective claims for accounting periods straddling the transition.
| Rule | Pre-April 2024 (SME Scheme) | Post-April 2024 (Merged Scheme) |
|---|---|---|
| Scheme applicable to SMEs | SME R&D relief: enhanced deduction of 130% on qualifying costs (later reduced to 86%) | Merged RDEC scheme: 20% above-the-line credit on qualifying costs. All companies use the same scheme. |
| Innovate UK grant classification | Classified as notified state aid under UK subsidy rules | No longer classified as notified state aid in the same way; subsidy rules apply differently under post-Brexit UK framework |
| Effect of grant on SME scheme claim | Notified state aid for a project pushed the entire project out of the SME scheme into RDEC, which had a lower net benefit rate at the time. Known as the "contamination" effect. | No contamination effect. Grant recipients claim under the merged scheme on the same basis as all other companies. The SME-scheme ring-fencing rule was not carried forward, so there is no scheme downgrade and no exclusion of grant-funded costs. |
| Grant-funded costs | Cannot be included in any R&D claim. Ring-fencing rule applied. | Can be included in an R&D claim, subject to the normal qualifying-expenditure rules. The ring-fencing rule was not carried forward into the merged scheme. |
| Company-funded costs on grant project | Could only be claimed under RDEC (lower rate) if the project received notified state aid | Claimed under the merged scheme at the standard 20% rate, same as all other qualifying expenditure |
| R&D outside the grant project | Unaffected by grant; claimed under SME scheme at full rate | Unaffected by grant; claimed under merged scheme at standard rate |
The practical consequence of the change is that companies which received Innovate UK grants before April 2024 and were deterred from claiming because of the contamination effect should reassess their position. For accounting periods beginning from April 2024, the contamination issue is resolved. For earlier periods still within the two-year filing window, the old rules apply but a specialist assessment will establish whether any claim was available under the pre-2024 framework that was not pursued. The subsidised-expenditure exclusion has gone the same way: for accounting periods beginning on or after 1 April 2024, grant-funded costs are no longer automatically excluded from the R&D claim either.
4. What "Subsidised Expenditure" Means Under the Merged Scheme
The merged scheme did not carry forward the SME scheme’s subsidised expenditure rule, sometimes called the ring-fencing rule, which excluded grant-funded costs from a claim. For accounting periods beginning on or after 1 April 2024, HMRC’s own guidance confirms that grant funding no longer reduces the R&D relief available, and the CIRD manual confirms there is no provision preventing subsidised expenditure from qualifying for the R&D expenditure credit the merged scheme is built on. Understanding how the old rule worked, and why it no longer applies, matters for any company still assessing a project against pre-2024 assumptions.
How the Old Ring-Fencing Rule Worked (Pre-April 2024)
Under the old SME scheme, before April 2024, only the portion of project costs directly funded by the Innovate UK grant was excluded from the R&D claim; the company's own contribution to the same project remained eligible, subject to the qualifying expenditure rules. Under the merged scheme, for accounting periods beginning on or after 1 April 2024, that exclusion has gone. If Innovate UK funds 60 per cent of a project's eligible costs and the company funds 40 per cent, both the grant-funded 60 per cent and the company-funded 40 per cent can now be included in the R&D claim (to the extent each meets the normal qualifying criteria) and claimed at the 20 per cent R&D expenditure credit rate. Whether the merged scheme applies to a specific project depends on the company's accounting period start date, and ERIS, the separate scheme for loss-making, R&D-intensive SMEs, has its own rules, so a specialist adviser should confirm the position for each project.
For accounting periods still governed by the old SME-scheme rules, or where a straddling period applies transitional rules, establishing which costs were grant-funded and which were company-funded still matters, and requires working through the grant agreement and the actual drawdown records. Innovate UK grant agreements specify eligible cost categories and the percentage of each cost covered by the grant. Where cost records are maintained by cost category and project, the separation is relatively straightforward. Where they are not, a specialist adviser can work through the grant documentation and expenditure records to reconstruct the split retrospectively. For accounting periods under the merged scheme, this split is still useful for grant compliance and internal record-keeping, but it no longer determines what can be included in the R&D claim.
One important nuance: Innovate UK grants typically cover eligible costs only. The grant does not cover ineligible costs, which may include certain overhead categories, VAT, or costs outside the specified project scope. Costs that were ineligible for grant funding may still qualify for R&D tax relief if they meet HMRC's criteria. The two eligibility frameworks are different and costs that fall outside one can fall inside the other.
5. UKRI Collaborative Research and Development Grants
Many Innovate UK grants are awarded as collaborative projects, where a consortium of companies and research organisations shares the project and the funding. Collaborative R&D grants have a more complex interaction with R&D tax credits because multiple parties are involved, each of which may have its own qualifying expenditure and its own R&D claim.
Each participating company in a collaborative project can claim R&D tax credits on its own company-funded qualifying expenditure. The grant funding received by each participant covers a portion of their costs; the rest is self-funded and eligible for relief. The fact that one consortium member has claimed relief on its costs does not affect another member's claim.
The subcontractor rules matter in collaborative projects. Where one consortium member pays another to conduct qualifying R&D, the paying company can include those costs as subcontractor expenditure at 65 per cent. The receiving company may also claim on its own costs. The 65 per cent rule is designed to prevent the same underlying staff or material cost appearing in full in two different claims.
Universities involved in collaborative grants occupy a different position. Universities do not claim R&D tax credits (they are not within the charge to UK corporation tax). Where a company pays a university as a subcontractor within a qualifying R&D project, the university subcontractor costs at 65 per cent are eligible in the company's claim without the concern about overlapping claims that applies to commercial subcontractors.
6. The Double-Claiming Opportunity
"A company with a £200,000 Innovate UK grant on a £500,000 project may still have £300,000 of qualifying expenditure eligible for R&D tax credits under the merged scheme."
The framing of "double-claiming" is sometimes treated as if it ought to be impermissible. It is not. It is the intended operation of two parallel government mechanisms designed to encourage R&D investment from different angles. Innovate UK grants reduce the financial risk of undertaking specific high-priority innovation projects. R&D tax credits reward the employment of staff and the incurring of costs in any qualifying R&D activity, regardless of whether those activities were grant-supported.
The combination of the two is particularly powerful for companies at the innovation frontier. A company awarded a competitive Innovate UK grant has demonstrated the quality of its R&D programme to an independent expert panel. Its qualifying R&D activity is well evidenced. Its cost records are already structured to meet grant reporting requirements. It is better positioned to prepare a high-quality R&D tax credit claim than most companies without grant history.
The opportunity also extends beyond the funded project. Innovate UK grant recipients are typically technology-intensive businesses with multiple qualifying R&D workstreams running simultaneously. The funded project may represent a fraction of the total qualifying activity. A comprehensive assessment should look at all R&D activity across the business, not just the grant project.
7. Common Mistakes Grant Recipients Make
Errors That Reduce or Eliminate the Claim
- Assuming the grant precludes all R&D relief. The most common and costly mistake. Grant recipients frequently assume, without checking, that the Innovate UK grant means they cannot claim R&D tax credits at all. Under the merged scheme, grant funding does not exclude any part of the project’s qualifying costs from the claim: the company-funded costs, the grant-funded costs, and all R&D outside the funded project can all remain eligible, subject to the normal qualifying-expenditure rules.
- Not separating grant-funded and company-funded costs. Where cost records do not distinguish between the two, establishing the eligible R&D claim requires additional reconstruction work. Companies that track costs by project and funding source from the outset avoid this problem entirely. For companies mid-project, it is worth establishing the cost-tracking discipline now rather than waiting until a claim is being prepared.
- Applying old rules to new accounting periods. Both the contamination effect and the subsidised-expenditure exclusion that applied under the pre-April 2024 SME scheme no longer apply under the merged scheme. Companies that were told not to bother claiming, either because their Innovate UK grant would push them to RDEC or because the grant-funded costs would be excluded, should take fresh advice. The merged scheme applies equally to all companies and both old restrictions have gone.
- Claiming only on the grant project. The grant project is usually the starting point for the R&D conversation. It is rarely the end. A specialist assessment will identify qualifying activity across the business, not just in the project that attracted Innovate UK funding.
- Missing the filing deadline on completed projects. Innovate UK projects have defined end dates. Where a project ended one or two years ago and no R&D claim was made, the window may be closing. The two-year filing deadline runs from the end of the relevant accounting period, not the end of the grant project.
8. Worked Example: £400,000 Project, £150,000 Innovate UK Grant
Worked Example: Grant Project R&D Claim Calculation
Company profile: 28-person software and hardware technology company. Received Innovate UK grant of £150,000 for a project developing sensor fusion technology for industrial automation applications. Total project cost: £400,000 over two accounting years. This example assumes an accounting period governed by the merged scheme (beginning on or after 1 April 2024), under which grant-funded costs are no longer excluded from the claim.
Step 1: Separate grant-funded and company-funded costs
| Cost category | Total project cost | Grant-funded (37.5%) | Company-funded (62.5%) |
|---|---|---|---|
| Staff costs | £240,000 | £90,000 | £150,000 |
| Subcontractors (university partner) | £80,000 | £30,000 | £50,000 |
| Consumables and test components | £48,000 | £18,000 | £30,000 |
| Software licences | £32,000 | £12,000 | £20,000 |
| Total | £400,000 | £150,000 | £250,000 |
Under the pre-April 2024 SME scheme, the grant-funded £150,000 shown above would have been excluded from the claim entirely, leaving only the £250,000 company-funded column to test against the qualifying-expenditure rules. Under the merged scheme, that exclusion no longer applies: the split is still useful for grant compliance and record-keeping, but it is not the boundary of what can be claimed. The qualifying-expenditure rules below are applied to the full £400,000 project cost.
Step 2: Apply qualifying expenditure rules to the full project cost
| Staff costs (fully qualifying) | £240,000 |
| University subcontractor costs at 65% | £52,000 |
| Consumables (directly used, fully qualifying) | £48,000 |
| Software licences (qualifying portion) | £32,000 |
| Total qualifying expenditure (grant project) | £372,000 |
Step 3: Add qualifying R&D outside the grant project
The same company also has two other qualifying R&D projects running concurrently, with total qualifying expenditure of £185,000. These are entirely unaffected by the Innovate UK grant.
| Qualifying expenditure from grant project | £372,000 |
| Qualifying expenditure from other R&D projects | £185,000 |
| Total qualifying expenditure | £557,000 |
Step 4: Calculate claim value under merged scheme
| R&D credit at 20% | £111,400 |
| Corporation tax on credit at 25% | (£27,850) |
| Net benefit (profitable company) | £83,550 |
Without the R&D tax credit claim, this company would have left £83,550 per year unclaimed. Because the merged scheme no longer excludes grant-funded costs from the claim, the Innovate UK grant does not reduce the qualifying-expenditure base: the R&D tax credit is calculated on the full project cost, subject to the normal qualifying-expenditure rules, plus the separately qualifying R&D activity.
9. Other Grant Types: SBRI, KTP, and EIC
Innovate UK is the most well-known source of innovation grants in the UK but it is not the only one. Several other government-backed grant mechanisms have a similar interaction with R&D tax credits and the same principles broadly apply.
SBRI (Small Business Research Initiative). SBRI contracts are structured differently from standard grants: they are procurement contracts for the development of innovative solutions to public sector challenges. The SBRI contract revenue is income, not a grant. R&D costs incurred under an SBRI contract may still qualify for R&D tax credits, but the subsidised expenditure analysis is different and requires specialist advice. The company bears all the R&D costs and receives contract payments; it is not a grant-recipient in the conventional sense.
KTP (Knowledge Transfer Partnership). KTPs are a three-way partnership between a company, a university or research organisation, and Innovate UK. The KTP associate (typically a recent graduate) works embedded in the company on a specific knowledge transfer project. The government funds a significant proportion of the associate's salary and project costs. The company's own contribution to the KTP, including management time, can qualify for R&D tax credits where the KTP project involves qualifying R&D activity. The KTP structure is well suited to generating an R&D claim alongside the partnership.
EIC (European Innovation Council) and Horizon grants. UK companies can still participate in some European funding programmes following the UK's association with Horizon Europe from 2024. EIC grants and Horizon project funding from European sources interact with the UK R&D tax credit scheme in a similar way to Innovate UK grants: for accounting periods under the merged scheme, grant funding does not automatically exclude the grant-funded portion from the claim, and the company's own contribution also remains eligible. The specific grant terms, funding source, and the applicable accounting period will determine the precise treatment, so specialist advice is recommended.
Catapult funding and collaborative programmes. Engagement with Catapult centres (such as the High Value Manufacturing Catapult, Connected Places Catapult, or Compound Semiconductor Applications Catapult) often involves cost-sharing on R&D projects. The company's own contribution to collaborative Catapult projects can qualify for R&D relief on the same basis as Innovate UK co-funded work.
10. Who Helps With an Innovate UK Grant Application and the R&D Tax Credit Claim?
Businesses applying for an Innovate UK grant, particularly a follow-on grant building on a previous award, often want one point of contact for both the grant and the tax side of the same project. In practice these are two separate specialisms. Grant-writing and Innovate UK application support, the technical narrative and cost breakdown for the bid itself, sits with Innovate UK’s own guidance, a grant-writing consultant, or your existing project team. The R&D tax credit side, working out how the grant interacts with your claim under the current rules (the subsidised-expenditure restriction that excluded grant-funded costs applied only under the old SME scheme, and was not carried forward into the merged scheme), and building the technical narrative HMRC expects for the claim, is a distinct exercise that works best running alongside the grant application rather than after it is decided.
Uplift Tax does not prepare Innovate UK grant applications. What we do is introduce grant recipients and applicants to HMRC-registered R&D tax specialists who can assess your project’s eligible costs, including how your current and any earlier grant funding affects them under the current rules, and build the supporting R&D tax credit claim correctly from the outset, so your grant cost records and your R&D claim records stay consistent rather than being reconciled after the event. If you are partway through a follow-on Innovate UK application and want the R&D tax credit side assessed in parallel, start with our free eligibility calculator or request a free assessment.