CIRD81650 – R&D tax relief: conditions to be satisfied: subsidies (SME scheme only)

CIRD81650 explains how subsidised expenditure affects eligibility for SME R&D tax relief. If R&D costs are subsidised, they generally cannot qualify for SME relief, although the company may still claim under the RDEC scheme instead. Notified State aid disqualifies the entire project from SME relief. However, if only part of the expenditure is subsidised, that portion is excluded while the remainder may still qualify. A clear and direct link between the funding and the R&D activity is required for HMRC to consider it subsidised. The guidance also covers how COVID-19 support schemes may affect claims, particularly under the Northern Ireland Protocol. 

HMRC has recently updated its guidance on subsidised expenditure under the SME R&D tax relief scheme (CIRD81650). This reflects the department’s revised position in light of recent First-tier Tribunal rulings. While the general principle remains that R&D tax relief is not available under the SME scheme for subsidised expenditure, the new CIRD guidance offers greater clarity on what constitutes a subsidy, particularly where third-party funding or contractual arrangements are involved. 

A key update highlights that subsidies are now assessed more directly against the specific expenditure they are intended to cover. The guidance clarifies that not all payments received by a company count as subsidies, even if they originate from another party. Expenditure is only deemed subsidised if there is a direct connection between the funding and the qualifying R&D costs. HMRC now emphasises that contracting and subsidising are separate legal concepts and should be evaluated independently based on the facts of each case. 

The revised guidance provides new examples illustrating when payments will and will not be treated as subsidies. For instance, where R&D is carried out independently and the company later sells resulting goods or services, those sales do not constitute subsidised income. Similarly, commercial loans or revenue from pre-existing products are not treated as subsidies. However, if funding is clearly linked to R&D activities—such as payments under contracts or routed via third parties—those costs may be treated as subsidised. 

An illustrative scenario has also been introduced. In this example, a building company independently conducts R&D during a routine roof replacement job. Even though the client reimburses the full contract cost, including the R&D expenditure, HMRC does not consider the R&D to be subsidised because it was not explicitly required or reimbursed under the contract terms. 

Summary of changes

The updated guidance in CIRD81650 introduces a more refined interpretation of what qualifies as subsidised expenditure for SME R&D tax relief. HMRC now places greater emphasis on whether there is a clear and direct link between any funding received and the R&D expenditure itself. It also makes a clearer distinction between subsidies and contracts for R&D work, treating each independently based on the specific facts of a case. 

SMEs are encouraged to carefully review funding sources, contract structures, and documentation to ensure their claims remain compliant under the government guidance. If you have any questions regarding your R&D tax claim, and the guidelines surrounding SMEs, please get in touch. 

Read the full guidance: CIRD81650 – R&D tax relief: conditions to be satisfied: subsidies (SME scheme only) – HMRC internal manual – GOV.UK