Module 5: Grants and subsidised expenditure

Public funding and a tax incentive often support the same project, and every scheme has a rule about how they meet. After this module you will be able to identify every source of funding touching a project, apply the model your country uses, keep a funding register that lets you show the arithmetic, and compare a grant with the benefit it displaces before you accept it.

What this module covers

Four models for how funding interacts with a claim: exclusion, reduction, adjustment after the fact and no restriction.
What counts as funding: grants, subsidies, other tax credits and customer payments.
The funding register and the split between funded and unfunded cost.
Timing: received, receivable and reasonably expected.
Comparing a grant with the benefit it displaces.

Four models

The schemes do not agree on what a grant does to a claim. Across the seven countries there are four models, and the finance team's first job is to know which applies before the project budget is built.

Model	What it does to the claim	Where it applies
Exclusion of funded expenditure	The funded portion of the cost is not eligible; the unfunded portion remains in the claim	Ireland, Singapore and the United States
Reduction of the base by assistance	The eligible base is reduced by assistance received, receivable or reasonably expected, including other tax credits	Canada
Adjustment after the fact	The full cost enters the claim and a later adjustment removes the extra benefit on the part that was recouped	Australia
No restriction	Grant funded expenditure is claimed in full	The United Kingdom, for accounting periods beginning on or after 1 April 2024

The models also disagree on what funding means. In the United States the test turns on whether payment is contingent on success and whether the company retains substantial rights. In Canada other tax credits count as assistance. In Singapore the grant itself is generally taxable income unless exempted.

What counts as funding

Keep the question broad. Each of the following can be funding under at least one scheme, so each must be identified and recorded even where your country's rule does not catch it:

Direct grants from national, regional or supranational bodies.
Subsidies that pay part of a cost line, such as a wage subsidy for people on the project.
Other tax incentives for the same costs, including regional credits.
Payments from a customer, partner or group company for the work, and cost sharing arrangements.
Recoupments received after the cost was incurred.
Assistance from a foreign government or an international institution.

For each item record the funder, the instrument, the costs it covers, the percentage or amount, the period and the conditions, including whether it is repayable. Customer and partner payments also raise the who-claims tests of module 4, and the funding register is where that analysis is filed.

The funding register

The register is a table kept alongside the project codes of module 2. Its columns: project code; funder and programme; agreement or letter of offer date; cost categories funded; funding rate or fixed amount; amount received in the period; amount receivable or expected; period covered; tax treatment of the receipt; and the claim periods affected. File the letter of offer, claims to the funder and remittance advices behind it.

Split funded from unfunded cost at the lowest level the grant allows. Where the grant pays named cost lines, tag those lines in the ledger. Where it pays a percentage of total project cost, apply that percentage to each eligible category consistently and write the method down. Where it funds a defined work package, give that work package its own project code. The register should let you state for any period: eligible cost incurred, funding attributable to it, and the resulting figure under your country's model.

Timing

Three timing problems recur. Approval and payment fall in different periods: some schemes count assistance when it is receivable or reasonably expected, so record the approval date and the entitlement, not only the cash. Grant periods rarely match the tax year: pro-rate by the cost incurred in each period rather than by the grant's calendar. Funding changes after the claim: a grant repaid, withdrawn or reduced, or a recoupment received later, means the earlier claim must be revisited under the country rule. The register's change log records these events with dates.

Comparing a grant with the benefit it displaces

A grant is not free money and a claim is not lost because a grant exists. The decision is arithmetic: calculate the benefit with and without the grant under your country's model, add the cash timing and the reporting conditions of the grant, and compare. Under the no restriction model both are kept in full. Under the exclusion and reduction models the net value of the grant is the grant less the benefit forgone on the funded portion. Write the comparison down before the grant application is signed.

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical company, has eligible project costs of 300,000 for the year and receives a public grant of 100,000 that pays one third of the project's staff and materials cost. Under the exclusion model the eligible base is 200,000. Under the reduction model the base is 300,000 less the 100,000 of assistance, again 200,000: in Canada, at the enhanced rate of 35% on qualified expenditure up to the expenditure limit, for most CCPCs and eligible Canadian public corporations, that is 70,000, and at the basic rate of 15%, 30,000 (Canada: CCPC enhanced refund). Under the no restriction model the base stays at 300,000: the United Kingdom gives a 20% expenditure credit on qualifying expenditure, taxable, so a gross credit of 60,000 before the tax on it (United Kingdom). Under the adjustment model the claim is made on 300,000 and an amount is then included in assessable income to remove the premium benefit on the 100,000 recouped. Elsewhere the benefit on the resulting base is calculated at that country's rate. The funding register records the grant, its date, rate, categories and periods, so each figure can be reproduced on request.

Across the seven countries

Each row uses that country's own wording and links to the page that holds the detail.

Country	Treatment of grants and other funding	Detail
United States	Research is funded if payment to the taxpayer is not contingent on the success of the research, or if the taxpayer does not retain substantial rights in the research. Research is funded only to the extent of the funding; qualified research expenses in excess of the amount funded may still qualify.	Funded research exclusion
United Kingdom	For accounting periods beginning on or after 1 April 2024 the merged scheme contains no restriction for subsidised or grant-funded expenditure.	Merged scheme
Ireland	Expenditure met directly or indirectly by grant assistance or any other assistance from the State, an EU institution or any other state is not qualifying expenditure.	Eligible expenditure
Canada	Qualified expenditures are reduced by government assistance, non-government assistance and contract payments that the claimant has received, is entitled to receive or can reasonably be expected to receive in respect of the expenditure. Provincial R&D tax credits are government assistance that reduces the qualified expenditures on which the federal investment tax credit is calculated.	Eligible expenditure
Australia	Where an R&D entity receives a recoupment from an Australian government agency for expenditure on which it has claimed the R&D tax offset, a clawback adjustment includes in assessable income an amount calculated so as to remove the premium benefit of the offset on the recouped expenditure.	Eligible expenditure
New Zealand	Eligibility requires that the person controls the R&D activities, bears the financial risk and effectively owns the results, and expenditure on R&D performed for another person is ineligible. Check Inland Revenue's guidance on how government funding affects eligible expenditure before claiming for a funded project.	Eligible expenditure
Singapore	R&D expenditure met by a government grant or subsidy is not deductible to the extent of the grant, and the enhanced deductions apply only to the portion of qualifying expenditure borne by the company. Government grants are generally taxable as income unless specifically exempted, and the letter of offer indicates the tax treatment.	Grants and other incentives

Where to go next

United States: funded research exclusion: the risk and rights tests in full.
Singapore: grants and other incentives: how grants, enhanced deductions and the cash payout fit together.
Canada: provincial credits: where one tax credit reduces the base of another.
In-House Finance Team Program: the overview and module list.