Innovation funding for start-ups and scale-ups

Thanks to ForrestBrown – innovation incentives consultant, for this Investment Month guest blog on how innovation funding supports growth in the tech industry.

Establishing a new business invariably comes at a significant financial cost and it’s implicit that securing funding is vital. Seed funding will likely be the first step on that growth journey, but once a business is established, what other funding mechanisms can it explore?

The government offers a range of incentives to support business growth – the most well known being R&D tax relief. Established 25 years ago, the incentive has supported countless businesses with their growth, not just in the early stages, but as they develop and become more sophisticated. Claiming has become part of their business cycle, with mechanisms put in place to capture R&D in real time, rather than retrospectively.

Beyond this established incentive, there are other lesser-known funding mechanisms – such as Patent Box, grants and capital allowances – that also merit exploration. Bear in mind too, that successfully claiming one incentive doesn’t preclude you claiming another. If you meet the eligibility criteria, then an application can be considered. 

For SMEs and scale-ups thinking of exploring innovation funding, here are five key questions to keep in mind.

R&D tax relief is available to a range of businesses at various stages of development. For R&D purposes, it’s important to know which stage of development you’re at. If you consider your business an SME, review the definition of what counts as an SME for the purposes of R&D tax relief. 

Following reform of the relief, for accounting periods beginning on or after 1 April 2024, SMEs fall into one of two schemes: the R&D merged scheme for non-R&D intensive SMEs and the enhanced rate for R&D intensive loss-making SMEs (ERIS). Those eligible under the merged scheme are those SMEs with less than 30% of total expenditure on qualifying R&D. R&D-intensive SMEs with more than 30% of total expenditure on qualifying R&D will qualify under ERIS.

Other factors – including headcount and turnover – can also influence eligibility, so it’s important for SMEs to undertake a full assessment. A specialist adviser can assist with this process – as well as preparing the claim itself.

Patent Box is a valuable – yet often overlooked – incentive, available to businesses in any sector with a UK-registered patent or patent granted in other specified jurisdictions.

The UK Patent Box regime is designed to encourage companies to keep and commercialise their intellectual property in the UK. It does this by reducing the corporation tax rate on profits generated through patents to an effective rate of 10% instead of 25%. 

To qualify, a business must:

• Be liable to corporation tax
• Make profits from the exploitation of patented inventions
• Own or have an exclusive licence over a patent
• Undertake qualifying development of the patent

If you meet these criteria, then it’s worth exploring your eligibility for Patent Box relief – even if you have successfully claimed R&D tax relief. The two are not mutually exclusive and can be explored simultaneously. It’s also possible to claim while your patent is pending or if your business has made an overall loss, so don’t be put off by common misconceptions.

Grant funding is available across many sectors, size and type of business – and forms a key part of the government’s growth strategy. Major schemes such as the Industrial Energy Transformation Fund and Life Sciences Innovative Manufacturing Fund exist to support particular sectors and open on a rolling basis for applications. The Autumn budget delivered significant new funding commitments for both, with applications currently open for round 2 of the LSIMF. Confirmation of the next application window for the IETF is awaited.

Beyond these headline schemes for life sciences and manufacturing, there are opportunities in other target sectors too. The Autumn budget also confirmed that two key UK sectors – aerospace and automotive – will receive significant funding, to the tune of £975 million and £2 billion respectively. This is to support clean growth, with competitions such as the Aerospace Institute Technology Programme and Automotive Transformation Fund now open for expressions of interest applications.

Innovate UK administers a range of grant funding programmes – including for SMEs – and offers a rich source of information on applying for grants. It has recently announced that it is reviewing the way it administers grant funding for SMEs, so keep an eye out for updates on new packages of support – expected in the Spring.

Regardless of the funding body, once opportunities have been identified, advisers such as ForrestBrown can assist with assessing eligibility criteria and preparing funding applications for submission.

If you’re scaling up, then it’s likely that you’re making investments in capital assets such as commercial property and equipment. If you are, then it’s worth exploring your eligibility for capital allowances – a tax relief that enables businesses and individuals to reduce their taxable profits by claiming deductions on eligible capital expenditure, such as equipment and property.

There are three main types of capital allowances associated with buildings – general pool, special rate pool and structures and buildings allowances – each with their own rate of relief, and various first year allowances.

Unlike with some other forms of tax relief such as R&D, there is no time limit on claiming capital allowances, but first year allowances must be claimed in the period in which the expenditure is incurred.

It’s also worth bearing in mind that if your capital expenditure relates to equipment and facilities used to carry out qualifying R&D activities, your business could also be eligible to claim research and development allowances.

As your business evolves, so too should your approach to claiming innovation incentives. For R&D, that might mean moving from a retrospective to a proactive approach to capturing R&D – where R&D is captured in real time – or diarising key dates for information filing. For grants, it could be keeping up to speed with announcements on new funding windows or putting together applications for sector-specific opportunities.

Whatever the trigger, it’s important to adopt a holistic approach – ideally in collaboration with an experienced adviser such as ForrestBrown, with its multi-disciplinary team of experts – who can offer advice across the full toolkit. Not only will this save you valuable time and resource, but ensure that you’re making the most of the varied funding options available.