Innovation funding and R&D tax credits

There is a balance all ambitious growth businesses must carefully strike between risk and reward, change and consistency.

Standing still is going backwards. Yet new ideas can be expensive; requiring investment in people, process and technology. Inertia can be as risky as pursuing a bold new idea and innovation can be daunting. But ultimately, new methods, ideas and products will separate you from competitors.

The UK has a range of funding incentives to encourage this innovation but it’s a shifting landscape.

In this article, we’ll explore this landscape of grants, reliefs and other funding available to the ambitious businesses shaping tomorrow.

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What is innovation funding?

Innovation funding is external money which helps your business develop a new product, service or idea. It can come from a variety of sources. We are not talking about debt funding. Nor are we talking about equity funding like venture capital (funding that requires you to give up equity). We are talking about research and innovation funding that comes directly or indirectly from the UK government or the EU. There are plenty of these innovation funding opportunities, which we explore below.

R&D tax incentives for funding innovation

R&D tax credits are a widely available innovation funding incentive for UK companies. If you are a limited company and spend money developing new products, processes or services; or enhancing existing ones, it is likely you will qualify.

You could claim back up to 27p of every pound you spend on qualifying activity post 1 April 2023 – regardless of whether the R&D was successful. The average SME claim is worth about £53,714 and many companies claim much more.

R&D tax credits are a valuable tax relief. Used annually, they help promote a culture of innovation, with the previous year’s R&D tax credit going on to fund further innovation or hire new talent, and so on.

At ForrestBrown, R&D tax credits is all we do. We get to see the impact of the incentives firsthand on those businesses we work with and the wider UK economy. However, other types of innovation funding may impact the amount you can claim under the R&D tax credit incentive. The next section explores how each other type of innovation funding interacts with R&D tax credits.

Innovation Grants

Innovation funding in the UK often takes the form of grants. These grants are attractive to businesses as they provide up front cash for a project. It’s important though to consider the interaction between grants and R&D tax credits, so that you can maximise your innovation funding.

Find out more about ForrestBrown’s grant advisory and application support service.

R&D tax incentives and grants

The important thing to understand here is what is and isn’t Notified State aid. EU competition rules prevent companies from claiming more than one type of (and benefiting excessively from) state aid, as it would give them an unfair advantage within the single market. Notified State aid is aid that has been approved by the European Commission – with certain limits.

If you’ve received a grant which is classified as Notified State aid this will limit your access to SME R&D tax credits, because they are also considered Notified State aid. How can you tell? Where appropriate, Notified State aid will be clearly indicated on your grant documentation.

You can claim R&D tax incentives with another type of Notified State aid, but claiming another type of Notified State aid will limit you, or the project, to claiming within the large company incentive (Research & Development Expenditure Credit- or “RDEC”). This is less generous than the SME scheme, worth 15p for every pound you spend on qualifying innovation.

In summary, UK funding and grants can be complex. But don’t worry, in the following sections, we’ll explain how these incentives work (and, crucially, how they work together).

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Innovate UK funding

Innovate UK is responsible for administering grants and other funding from the UK government. It has done this via grants, loans and vouchers. Innovate UK grants, loans and vouchers are for UK-based businesses which are seeking to advance innovative ideas.

Innovate UK has no connection with R&D tax credits, which are a Corporation Tax relief administered by HMRC. Innovate UK grant funding is almost always considered Notified State aid. It is awarded to designated ‘winners’ following a funding competition.

Beyond grants, there are two other forms of Innovate UK funding. These are Innovate UK innovation loans and Innovate UK innovation vouchers (the latter have been available in the past but are not currently being offered).

Innovate UK grants

You can apply for Innovate UK grants between £25,000 and £10 million if you have an innovative idea to progress. All grants are applied for through Innovate UK funding competitions. These run in cycles, so each funding competition will have an open and close date.

Innovate UK’s grants have a broad scope. The Innovate UK Smart Grant, for example, is open to any business seeking to deliver an ambitious or disruptive R&D innovation. On the more niche side, there’s a specific grant for key technology components for local energy systems.

Innovate UK loans

Innovate UK loans are also awarded through competitions. An Innovate UK loan competition is accessed online in the same way as grants. Innovate UK innovation loans are provided on favourable terms. But each one offered will have its own terms.

Innovate UK vouchers

It’s worth mentioning Innovate UK innovation vouchers, although these aren’t currently available. Worth up to £5,000, they were awarded on a lottery basis between 2012 and 2016 to companies wishing to work with an external expert to gain the knowledge to innovate and grow.

Innovate UK vouchers were usually below a lower limit (the “de minimis” threshold), which rules out smaller amounts of funding from being classed as Notified State aid. This de minimis threshold is currently £200,000 over three years.

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Small Business Research Initiative (SBRI)

The Small Business Research Initiative, or SBRI for short, is another source of innovation funding from the UK government which is administered by Innovate UK. It is not a grant. Instead, it is a route to providing a subcontracted service to a public body in need of an innovative solution which it can’t deliver itself. For example, at the time of writing, there was an interesting SBRI open to encourage innovation in automated tunnel examination, to help safeguard rail engineers.

Typically, you gain funding through a lead customer who needs what you are developing, and you retain your intellectual property rights and equity. Some SBRI contracts fund feasibility and prototype costs too.

While Small Business Research Initiative funding is not a grant, HMRC insist that it is treated as a grant for tax purposes. This means that you will probably have to use the RDEC scheme rather than the SME scheme when claiming R&D tax credits on expenditure related to an SBRI.

Please read Grants and R&D tax credits – How to do both for more information.

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Industrial Strategy Challenge Fund

The Industrial Strategy Challenge Fund (ISCF) is a raft of extra government funding that forms part of their Industrial Strategy. This is the long-term plan to raise productivity in the UK.

ISCF has been giving out funding in waves to support R&D in specially selected challenges. The challenges must have world-leading research based in the UK and companies ready to innovate. And the global market must be considerable or rapidly growing and sustainable.

As with other government funding, Innovate UK awards the Industrial Strategy Challenge Fund grants. It is a similar competition format.

Innovate UK Industrial Strategy Challenge Fund awards are considered Notified State aid. To see how Notified State aid interacts with R&D tax credits, please read Grants and R&D tax credits – How to do both.

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Knowledge transfer partnership

Knowledge transfer partnerships (KTPs) are part-funded initiatives in which you can get a suitable graduate into your business to help deliver a specific strategic innovation project. The cost of the KTP includes the salary of the associate that works with you and paying for a supervisor who oversees the scheme. SMEs would be expected to pay about a third of the overall cost and larger businesses half.

You apply for a knowledge transfer partnership through the KTP office of the academic or research organisation you wish to partner with. Or, if you don’t have an organisation to partner with yet, a local knowledge transfer adviser.

KTPs are not usually Notified State aid, but we would always advise checking your paperwork. Knowledge transfer partnerships are a strong indication that R&D may be present.

To see how non-Notified State aid interacts with R&D tax credits, please read Grants and R&D tax credits – How to do both.

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Patent Box

The Patent Box regime is an innovation tax relief that gives you a lower rate of Corporation Tax (10%) on profits derived from patented inventions. You file for patent box tax relief in the computations accompanying your company tax return.

To benefit, you must do this within two years after the end of the accounting period when the profits were generated. If you are doing this then you should explore whether you qualify for R&D tax credits.

UK Patent Box is not considered Notified State aid so can be used side by side with R&D tax credits – without any impact. The patent box relief rewards the invention, while the R&D rewards the innovation process.

Find out more about ForrestBrown’s Patent Box relief service.

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Horizon 2020

Horizon 2020 was the main framework through which the EU distributed its innovation grants since 2014. It reached end of life in 2020, although realistically Horizon 2020 funding had been drying up for UK businesses since the country signalled its intention to leave the EU.

However, as the funding comes from the EU, Horizon 2020 grants are not considered Notified State aid meaning they can be claimed alongside R&D tax credits. Understanding the impact of grants on R&D tax relief is also one of our 9 business planning steps to follow to maximise the benefits of R&D claims.

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Creative sector reliefs

The UK government offers a suite of reliefs for the creative sectors which are each specific to one of a series of creative industries. These reliefs are:

• Video games tax relief
• Film tax relief
• Animation tax relief
• High-end television tax relief
• Children’s television tax relief
• Theatre tax relief
• Orchestra tax relief
• Museums and galleries exhibition tax relief

These are considered state aid which means they cannot be used in conjunction with R&D tax credits on the same expenditure.

In reality, only one of these is likely to have any overlap with R&D tax credits, and that is UK video games tax relief. Many activities during the production of video games potentially qualifying for R&D tax credits. You can read more about this in our article on software R&D.

UK creative sector reliefs can be found on the government website.

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Claiming R&D tax credits to fund your innovation

In summary, there are many funding options available to drive your business growth. None of which depend on giving up equity. In fact, this is the funding investors like to see being used to protect value in a business.

But it pays to seek the advice of a specialist on how to optimise your position. In most cases, you will be able to claim grants, loans or other forms of funding and R&D tax credits. But you need to apply in the right way.

Our R&D tax credit specialists will be able to talk you through the best approach for your business and answer any questions you have.

Speak to our team today at hello@forrestbrown.co.uk or on 0117 926 9022.