Guide to Government Funding for Startups

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By Harinder Sandhu, founder and CEO of EmpowerRD

Government and regional bodies provide a variety of different funding options for innovative startups. This guide helps you to navigate which ones might be most suitable for your business and how to apply for them.

The funding initiatives target businesses at different stages of growth. We’ve grouped them to make this guide easier to navigate.

Funding for Your Idea

Local Funding

There’s an enormous variety of local funding opportunities across the UK. Some are backed by the government’s Regional Growth Fund, some by councils and others by non-governmental bodies. The government has pulled together the full list in this useful database of regional funding in the UK. It’s the best place to find the funding options most suitable for your business.

While the majority of Regional Growth Funds target businesses at the earliest stages of their development, some can include later stages of funding such as the Northern Powerhouse equity investment (which provides funding up to £2 million).

Regional Funds may also offer non-monetary help to early-stage businesses such as mentoring and financial advice.

Innovate UK Grants

Since the pandemic, Innovate UK’s role in funding businesses in the UK has an additional £750 million allocated to their funding schemes. As a result, Innovate UK grants remain the most effective way of funding your innovation prior to equity investment and commercialisation.

The grants are split into either sector-specific grants such as those solving one of the Industrial Strategy Challenges, and the “Smart Grants” which are open to all innovative businesses regardless of their sector.

The UKRI Funding Finder is the best place to find information on which competitions are available. The Funding Finder also provides information on a variety of other funding opportunities, although many of these are restricted to research institutions such as universities.

EU Grants

The UK and EU have agreed in principle to the UK’s continued participation in the Horizon Europe framework which funds numerous grants programmes across the EU. The UK’s participation is still being debated in parliament, although it is expected to be agreed upon.

The UKRI EU funding page is the most up-to-date place to find out about the availability of EU innovation funding in the UK.

Funding for Your Product

R&D Tax Credits

Research and Development Tax Credits are a retrospective funding option that provides either a cash credit or tax reduction on your R&D expenditure after you’ve submitted your accounts for the year. As a result, it cannot prefund an idea into production, but it can provide a significant amount of funding after you’ve started the product development process.

Recipients receive back up to 33% of their R&D expenses, with the average claim in 2020 being £57,228. The scheme was introduced in 2000 and is expected to remain in place for the foreseeable future.

We have published an introductory guide to claiming R&D Tax Credits, which is a good place to start understanding the scheme. If you’re claiming for less than £50,000 worth of R&D costs we recommend using the government’s own guide to submit your own claim.

R&D Advanced Funding

While the R&D Tax Credits can only provide retrospective funding, you can take a loan against your future R&D tax credit using a third party loan provider. Given that the loan is secured against your tax credit, the rates are significantly better than typical bank financing at a similar stage of growth.

There are numerous providers, and often R&D tax advisors will offer a financing service alongside their claim service.

R&D Capital Allowances

These are similar to R&D Tax Credits, but Capital Allowances allow for money back on assets that aid innovation, rather than the staff and expendables costs that are claimed for using the R&D tax credit. The scheme offers 100% tax relief on the capital expenditure which contributes to your innovation.

These are widely used amongst manufacturers who will invest heavily in machinery to deliver a novel product type. We recommend talking with a knowledgeable accountant about whether these allowances will apply to you.

Funding for Your Growth

Patent Box

Patent Box provides a corporation tax deduction for the profits arising from a patent or other “qualifying IP right”. All profits from the patented product will have an effective 10% corporation tax rate applied.

Applying the Patent Box tax reduction is notoriously complicated. For example, deciding when to elect into the Patent Box is crucial, as past losses from the patent can be offset against future profits. We strongly recommend speaking to a variety of informed advisors to understand whether Patent Box is right for your business.

Innovate UK Loans

Innovate UK has historically offered a number of loans to growth-stage companies to help fund the commercialisation of their product. The loans delivered range from £100,000 to £1 million, at a typical interest rate of 7.4%. With a 5-to-10-year repayment schedule, these loans significantly outperform bank-lending at the same stage of business growth.

Since Coronavirus, Innovate UK have changed the purpose of these loans. They are now aimed at supporting previous Innovate UK winners who are struggling because of the pandemic. Find details of them here. We expect that these loans will return to their previous form once the pandemic is over.

Additional Considerations

Since the pandemic, there have been a number of funding packages outlined by the government to aid both employees and businesses. Some of these may still be available to your business, so we recommend referring to our full government funding guide which is regularly updated.

Additionally, it’s important to understand how each of these funding options can interact with each other. For example, taking a grant from Innovate UK can reduce the value of your R&D tax credit for the same period. In some cases, even the private funding spent on your R&D will be subject to a reduced R&D tax credit rate. For that reason, it’s important to be advised by a specialist in each of these areas to ensure that you’re maximising your benefit without any unwanted impacts on your broader financial health.

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.

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