Please note: The information contained in this article was updated on 4th November 2020. For the most recent version of this guide, head to the EmpowerRD website. Claimants should also consult the UK government’s website for updates on individual schemes.
This guide looks at all the government funding options available for startups, from incorporation through to the later stages of growth. We’ll cover the year-round funding available to innovative businesses (“Innovation Funding”).
Innovation Funding
To make this section easier to navigate, we’ve organised the funding options according to their position in the innovation lifecycle.
We’ll cover 3 stages
- Ideation: i.e. research or business plan stage
- Product Development e.g. building out your MVP and
- Commercialisation i.e. growing your customer base or usage figures.
While it’s more likely that an early-stage business will benefit from the Ideation and Product Development stage funding, that isn’t exclusively the case.
Large businesses often undertake new innovation projects that mean they qualify for the earlier stages of funding even if their core business is at late stages of Commercialisation.
For that reason, it’s worth considering the full variety of activities your business is currently engaged in to ensure that you don’t miss out on any relevant funding.
1. Ideation Stage Funding
Local Funding
We recommend every founder identifies the local funding available to their business as soon as they’re incorporated.
The vast majority of local funding is for early-stage businesses, but there are some awards for the growth phase, e.g. the Northern Powerhouse Fund offers an equity finance option up to £2 million.
In total, there are over a hundred and fifty different local grants or loans available in the UK.
They can be
- regional level e.g. British Enterprise Fund – North of England,
- county-level e.g. Agri-tech Cornwall,
- city level e.g. Ad:Venture – Leeds City Region or
- borough level e.g. Reigate and Banstead Business Support Grant.
The amounts vary in size from approximately £500 to £2 million. The awards will also depend primarily on your primary business address.
In addition, the grants can sometimes be
- sector specific e.g. East of England Transport and Logistical Efficiencies Fund or
- founder specific e.g. Growing Graduate Enterprise Lincolnshire.
The government’s Regional Growth Fund list is the best place to get the complete list of local grants and loans available.
Innovate UK Grants
Innovate UK delivers the UK’s primary innovation grant scheme.
It was established to fund innovation that the private sector considers too risky. So the grants are mostly aimed at companies engaged in Ideation stage R&D, for example:
- research,
- prototyping,
- planning etc.
The majority of grants are linked to the current technological “challenges” agreed in partnership with industry. The list of challenges can be found on the UKRI website. If you’re operating in a sector covered by one of these challenges then your business is more likely to succeed in attracting grant funding. Innovate UK also offers a smaller amount of sector-agnostic, “Smart”, grants. These are more competitive, and can be found in the full list of grants on the government website.
The average size of the grant awarded in 2019 was £270,000 but can range from £25,000 to £millions depending on the grant you apply for. For some grants, you’ll need to apply in partnership with another business.
The Knowledge Transfer Network is a government-funded organisation which promotes the takeup of the Innovate UK grant scheme. We find that their grant listings are the easiest to navigate. Additionally, if you plan to apply for a grant then get in touch with their team as they run a number of workshops and training sessions to help with your application.
EASME (EU Grants)
As part of the government’s withdrawal agreement, the UK pledged to honour all EU grants awarded while we were a member of the European Union. How these grants will be delivered after Brexit is still being debated as part of the separation treaty, but it is expected that either
- the UK will continue to be involved with the current EU grants framework, or
- the UK will replace that framework with another similar international set of grants which aim to foster cross-border innovation.
Grants are available for all sizes of businesses, including those at the earliest stages of Ideation (such as business plan stage).
For that reason, we recommend that all businesses speak to a government-funded delivery partner such as Newable or Business West to ensure that you’re not missing any EU grant funding suitable for your size or sector.
2. Product Development Stage Funding
R&D Tax Credits
You can use R&D Tax Credits to claim back up to 33% of the money you’ve spent on R&D.
For most early-stage businesses, your R&D spend will relate to the development of your first product.
The most common costs associated with that development will be
- your engineering and product team salaries,
- any materials needed in the development process.
You’ll only be awarded the credit after you’ve spent money on R&D. (R&D credits are different to grants which are designed to pre-fund R&D).
You need to submit a claim for R&D Tax Credits after you’ve closed your accounts for the year, as you’ll be claiming on your R&D costs for that prior financial year.
If you’ve spent less than £50,000 on R&D, we recommend you
- File your application yourself
- Consul the government guidance on making a claim.
- Read our Introduction to R&D Tax Credits to understand the scheme in more depth.
If you’ve spent more than £50,000 on R&D, we recommend you
- Get a specialist to compile your claim.
A specialist will help ensure that your claim is successful and that you’re claiming against the maximum amount of costs that you’ve incurred. This can get quite tricky, especially as you grow.
At EmpowerRD we’ve updated the traditional process of making a claim. Our R&D claims experts work together with an intelligent online platform which significantly speeds up the process of making a claim. Our technical efficiencies also allow us to charge significantly lower fees than traditional advisors. Have a look over our website to understand more about how we differ from the traditional method of submitting an application.
If you’re finding it hard to understand whether you meet that £50,000 threshold then we recommend checking our guide to identifying your R&D costs.
R&D Tax Credit Advanced Funding
As discussed, you can only submit R&D tax credit applications once the costs for R&D have been incurred in the financial year. Additionally, it can take up to 3 months for you to receive the credit after you submit the claim to HMRC. In 2019, we saw an average wait-time of 42 days from submission to payment .
For that reason, many businesses will opt in to receive Advanced Funding secured against the award of their credit. This can either be delivered up to 9 months before the claim is submitted (“pre-submission funding”), or it can be issued at the point the claim is submitted (“post-submission funding”).
At EmpowerRD we offer both services.
- For post-submission funding we offer a fixed 5% fee via our EmpowerRD Now service.
- For pre-submission funding the interest rates will vary depending on the size of your claim, company circumstances and loan duration.
Get in touch with one of our team to understand more.
R&D Capital Allowances
These are similar to R&D tax credits, but you can use the R&D capital allowances scheme to claim back money on assets which aid innovation, rather than staff and expendables. The scheme offers 100% tax relief on capital expenditure which aids innovation. Any UK business is eligible to apply. The commercial activity must meet the government’s standard of innovation also required of R&D tax credits.
This is likely to be most relevant to your tech business once you’ve reached a certain scale and invest in internal IT systems. Or if you’re developing hardware which requires upfront investment in production machinery. We recommend talking with a knowledgeable accountant about these.
3. Commercialisation Stage Funding
Innovate UK Loans
We feel these loans are the most overlooked option for early-stage tech companies in the UK.
Of course equity financing brings access to networks which can help your business in non-monetary ways, but the rates available for Innovate UK loans make these an interesting funding option without diluting your equity.
Innovate UK loans
- are explicitly developed to help with the commercialisation stage of developing new products.
- deliver between £100,000 and £1 million, depending on your project requirements.
- have a typical interest rate of 7.4% with a 5 to 10 year repayment schedule – significantly outperforming most bank lending at the same growth stage.
- Are only available to businesses with fewer than 250 employees so it may well be a good alternative to raising a Seed or small Series A round.
Patent Box
This tax reduction is designed to reduce the significant costs associated with acquiring a “qualifying IP right” – most typically a patent. If granted, a company can apply a reduced corporation tax rate of 10% to worldwide profits arising from the invention.
In 2016, the government made changes to the scheme to close some loopholes. The downside of these changes is that it’s now renowned for being very complex to apply for and administer.
This is most significantly the case when considering when to opt into the scheme. The relief is only applicable to the profit derived from the patented product, and it also has a fixed time limit.
If you opt into the scheme too early then your early losses bringing the product to market may prevent you from benefiting from the reduced rate of corporation tax once you gain market traction.
Our general recommendation is that if you’re planning to patent your invention, then hire professional advice to see whether this form of relief will be suitable for your business, and when it should be activated.
About the author
Harinder Sandhu is the founder and CEO of EmpowerRD, which combines the expertise of industry-leading claims advisors with modern technology to deliver an improved R&D claims experience at a fraction of the cost of traditional advisors. Before founding EmpowerRD, Hari was Government Incentives sector lead at PwC. As a member of HMRC’s R&D Consultative Committee, Hari also advises the government on the best means to incentivise innovation in the economy. He has processed claims for companies ranging from early-stage startups to blue-chip multinationals like HP and RBS.
For more information, please enquire at empowerrd.com/capital-enterprise.
Please note: The information contained in this article was updated on 4th November 2020. For the most recent version of this guide, head to the EmpowerRD website. Claimants should also consult the UK government’s website for updates on individual schemes.
