Grant funding and Research & Development (R&D) Tax Credits are both amazing ways in which the government has incentivised tech innovation in the UK.
These two systems offer support at different ends of the research & development (R&D) process, so it’s important for founders to distinguish their benefits and find out which route would best benefit their business.
But why choose when you can have both?
This article will outline what both schemes are, what they offer, and how you can take mutual advantage of them.
In the early stages of a startup’s journey, well-formulated, feasible products and services can be selected for grant funding opportunities.
Grant Funding is government-provided capital that can be spent on virtually any business cost (excluding sales & marketing) that will help set a startup’s plans into motion.
Instead of founders pouring their own money into their project, securing Grant Funding spurs them to take the plunge, by reducing capital risk and providing an upfront financial safety-net.
The biggest draw to government grants is that the money on offer is:
· 100% guaranteed upon success;
· Totally free and non-repayable;
· Not at risk of diluting your corporate equity.
That’s right, you can avoid the hang-ups of other funding routes, such as racking up interest from debt funding or sacrificing equity of your startup.
So why doesn’t every small business just use Grant Funding instead?
The truth is that these perks incite fierce competition, and more startups than ever before are now applying.
It’s becoming increasingly difficult to get selected. That’s why grant-writing experts, such as our partners at GrantEd, have built an all-in-one grant consultancy platform, which maximises applicants’ chance of success.
For single applicants with projects that span over 6-18 months, funds of £25k - £500k are available. However, for joint applicants that have an 18-36 month project in mind, funds awarded can reach up to £2M.
The Innovate UK Smart Grant is a renowned competition that sets aside £25m aside every quarter – that’s £100m available every year for impressive UK startups. Find out more about the application process, here.
R&D Tax Credits
Further down the line, when your research & development (R&D) spending is already well underway, startups can benefit from R&D Tax Credits.
R&D Tax Credits offer startups the chance to claim back up to 27% of capital spent on research and development, after their first financial year. This substantial proportion of cash can be a vital way to reinvest into the growth of a startup. Like grant funding, R&D tax relief also doesn’t sacrifice equity.*
So, who decides how much money a business can reclaim?
There are a few factors which ultimately determine what percentage of research and development costs a startup is entitled to. The first of these is the type of claim available to them.
Most emerging companies will pursue the SME Scheme, provided that they have:
· Less than 500 employees;
· Less than €86m in gross assets;
· Achieved less than €100m in turnover
The business’ financial position at the time of claiming also plays into potential claim size.
Under the SME scheme, loss-making companies are entitled to claim up to 27% of total R&D eligible costs, which is paid directly, in cash, into your bank account.
If you're making a profit, the business can be awarded up to 21.5% of total R&D eligible costs, this time in the form of a tax credit.
If your startup exceeds the SME metrics – congratulations, you’re doing a great job! – but more importantly, you’ll have to file under the RDEC Scheme, which offers a fixed rate of 20% (subject to corporation tax).
Of course, 20% of research and development spending for companies of this size still represents a huge amount of cash – so it’s still very worthwhile undertaking!
We appreciate that was a lot of percentages and numbers, so we’ve provided you with some examples below to further clarify what you could be entitled to receive:
a) You meet the criteria for the SME Scheme, haven’t yet been able to turn a profit and you’ve spent £100,000 on R&D over the past year. This means you could be entitled to up to £27,000 worth of cash to be refunded to your bank account.
b) You fall under the SME Scheme, your startup is profitable and you’ve spent £100,000 on R&D. This means you could be entitled up to £21,500 in tax relief.
c) Your business has scaled, you’re now eligible for the RDEC Scheme and you’ve spent £300,000 on research and development this year. Your tax benefit would then be £60,000, however under RDEC you will then have to then factor in corporation tax which is 25%. After corporation tax, your claim can save you around £45,000 worth of taxes.
Can they work together?
So, Grant Funding is concerned with facilitating your business’ take-off, and R&D Tax Credits seek to enhance your growth trajectory through re-investment.
The great news is that you don’t have to pick just one route to follow.
You can use both of these generous systems in conjunction with each other on the same research & development project.
There are a few conditions to this rule though, which we'll let you in on now.
The main issue revolves around whether or not your grant is classified as ‘notified state aid’, which is government funding regulated by the European Commission (EC). Under EC regulation, startups are not allowed access to more than one type of notified state aid for the same research and development work.
This is so a limit is placed on the amount of financial support each country can distribute, to avoid biases across the continent.
If the grant you received is classified as notified state aid, such as the Innovate UK Smart Grant, you won’t be able to file under the more lucrative SME Tax Credit Scheme.
But don’t worry! The RDEC Tax Credit Scheme is compatible with projects funded by notified state aid, so businesses subsidised by a government grant can still take advantage of R&D Tax Relief.
With RDEC being the only viable route, your potential claim size is capped at 20% (before corporation tax). Since you’re reclaiming a portion of free money, this is far from a drawback, and still extremely useful in elevating your startup’s growth trajectory.
What’s more, whether the SME Tax Credit Scheme or the RDEC Tax Credit Scheme works for you, you can claim and reinvest year after year with R&D Tax Credits.
And if you’re realising you’ve missed out on previous potential R&D Tax Credits, you can claim up to two years prior.
Let’s paint the picture to make this a little clearer:
You’ve been awarded a grant of £250k from Innovate UK to kickstart your business venture. You’ve spent the entire £250k on R&D over the past year, but you’re not yet generating profit. Because you’ve received notified state aid already, your financial position doesn’t matter. Assuming the expenditure qualifies for RDEC, you’ll be able to claim £37,500 (20% of £250k, after corporation tax) worth of tax relief.
So that’s the basics when it comes to using Grant Funding and R&D Tax Credits, together and independently. In some cases, other nuances arise that can complicate the way these systems intersect.
The good news is you’ll never have to figure out your eligibility alone. At Claim Capital, our R&D Tax Credit experts with years of experience are on hand to ensure that your R&D Tax Claim returns every penny possible.
Better yet, our services operate at an affordable fixed fee, regardless of the size of your claim and – the best part – only payable upon success.
If you’re used to paying your R&D tax advisor a hefty percentage-based fee, find out more about how you can save with Claim Capital.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.