Guide to government funding

This guide runs through the major forms of government funding available to innovative businesses of every size: from sole-traders to multinationals. We’ll cover the year-round funding available (“Innovation Funding”), as well as the schemes designed to help businesses through the Coronavirus pandemic (“Coronavirus Funding”).

This guide was last updated on 4th August 2021.

To help navigate this section, we’ve organised the funding schemes according to their stage in the innovation lifecycle. Firstly we look at Ideation Stage schemes, which are applicable when you’re planning or researching your innovation. We then look at the Product Development and Commercialisation stage schemes.

While it’s more likely that a small startup will benefit from Ideation and Product Development Stage Funding, that is not exclusively the case. Large businesses can engage in innovation projects which qualify for early-stage funding schemes, even if their core business is mature. For that reason, it’s important to know of all your company’s innovation projects before you identify suitable funding.

Ideation Stage Funding

Local Funding

We suggest that every founder identifies relevant local funding schemes as soon as they register their business. The majority of local funding is limited to early-stage companies; however, there are some awards for larger businesses in their first growth phase, e.g. the Northern Powerhouse Fund offers an equity finance option up to £2million. 

There are over 150 local grants or loans available in the UK. They can be on a regional level (e.g. East of England Regional Growth Loan Scheme), county level (e.g. Rosebud Micro-Loans Lancashire), city level (e.g. Growth Start-up Support Programme – Greater Manchester) or even on a borough level (e.g. Self-employed Support – Royal Borough of Kensington and Chelsea). The amounts vary in size from approximately £500-£2million.

The awards will, of course, be primarily dependent on your business’s location. Also, the schemes can 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 has the most complete list of local schemes available.

Innovate UK Grants

Innovate UK are charged with delivering the UK’s largest innovation grant scheme. The government established this grant scheme to fund innovation that the private sector considers too risky. So the grants are mostly aimed at companies engaged in Ideation Stage R&D, e.g. research, prototyping, planning etc. 

Most of the grants are linked to the current technological “challenges” agreed together with industry. The list of challenges can be found on the UKRI website. If you’re operating in a sector related to one of these challenges, then your business is more likely to succeed in claiming a grant. However, Innovate UK also offer a smaller quantity 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 value of the grants awarded in 2019 was £270,000. They can range from £25,000 
to £millions depending on 
the grant applied for. For some of the grants, you’ll need to make a joint application with another business.

The Knowledge Transfer Network is a government-funded organisation which promotes the takeup of the Innovate UK grant scheme. Their grant listings are the easiest to navigate. Additionally, if you plan to apply for a grant then it’s worth contacting their team as they run a number of workshops to help with your application.

EU Funded Grants

Despite Brexit, the UK has continued its involvement in the Horizon Europe grants framework. Horizon Europe will deliver €95billion of innovation funding to projects across the EU and associated countries. 

There are numerous strands to the Horizon Europe framework, but the most relevant for UK startups is the European Innovation Council and SMEs Executive Agency (EISMEA). This body offers grant funding to innovative SMEs either as a standalone organisation or in a consortium with othe organisations.

EISMEA offer grants linked to specific missions, such as stable debt collection services or affordable housing. They also have more regular open calls, such as those offered through the EIC Accelerator. 

There are numerous agencies affiliated with the Horizon Europe scheme, each of which will offer different forms of financial support. It’s important that you consult an authorised expert to help navigate through the different funds available. 

The government has a list of recommended contacts to help orgsanisations access the Horizon Europe scheme. For SMEs, they recommend speaking with Innovate UK EDGE (a government funded delivery partner). Be sure to check the broader list however, as the best point of contact for your industry might be elsewhere in the UKRI (the UK’s primary body for innovation funding).

Product Development Stage Funding

R&D Tax Credits

This credit allows you to claim back up to 33% of the money you’ve spent on R&D. For most early-stage businesses, your R&D costs 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, as well as any materials needed in the development process.

The R&D tax credit is awarded after the R&D costs have been incurred. In that respect, it’s different from a grant which is designed to pre-fund R&D. A claim for R&D Tax Credits needs to be submitted after you’ve closed your accounts 
for the year, as you’ll be claiming on your R&D costs for that prior financial year.

The government has taken steps to make it easier to self-file your application, and we recommend that you pursue that route if you’ve spent less than £50,000 on R&D. To do so, consult the government guidance on making an R&D tax credit claim. Our Introduction to R&D Tax Credits is also a good place to start when trying to understand how the scheme works. 

If you’ve spent more than £50,000 on R&D then it makes sense to engage with a specialist to help compile your claim. A specialist will help ensure that your claim is successful and that you’re claiming the most credit that you can. Determining which costs to claim against can get quite tricky, especially as you grow. 

At EmpowerRD we’ve significantly improved the traditional process of making a claim. Our R&D claims experts work together with an intelligent online platform which speeds up the process of making a claim from 8-12 weeks down to 1-2. Our technical efficiencies also allow us to charge significantly lower fees than traditional advisors. 

If you’re unsure about 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, R&D tax credits can only be claimed once the R&D costs have been incurred during the financial year. On top of that, it can take up to 3 months to receive the credit even after the claim is submitted to HMRC. The average duration between the claim being submitted and the payment being cleared at HMRC was 42 days in 2019.

For that reason, many businesses will choose 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 financing”) or delivered at the point the claim is submitted (“post-submission financing”).

At EmpowerRD we offer both types of advanced funding. For post-submission financing, we offer a fixed 5% fee via our EmpowerRD Now service. For pre-submission financing, 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 capital allowances allow for money back on assets which aid innovation, rather than staff and expendables. The scheme offers 100% tax relief on the capital expenditure which contributes to your 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 widely used amongst manufacturers who will invest heavily in machinery to deliver a novel product type. For software businesses the most common form of capital expenditure claimable under this scheme will be large-scale internal IT systems. 
We recommend talking 
with a knowledgeable accountant 
about whether these Allowances will apply to you.

Commercialisation Stage Funding

Innovate UK Loans

We find that most high-growth businesses will overlook the potential for financing as a means of expansion versus the more traditional equity investment route. Of course, equity rounds bring access to networks which can help your business in non-monetary ways, but the rates available for Innovate UK loans make these an interesting route to growth without giving away equity.

The loans are explicitly aimed at helping with the Commercialisation Stage of innovation. They deliver between £100,000 and £1million, depending on your individual requirements. They have a typical interest rate of 7.4% with a 5-10 year repayment schedule – significantly outperforming most bank-lending at the same stage of business growth. Only businesses with fewer than 250 employees can apply so it might be a good alternative to raising a Seed or small Series A round.

During Coronavirus, Innovate UK changed the purpose of these loans to support businesses struggling with a loss of income. It’s not entirely clear whether they are now available on a widespread basis. We recommend speaking with Innovate UK EDGE to find out more. 

Patent Box

This tax reduction is designed 
to reduce the significant costs associated with obtaining 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 known as being extremely complex to apply for and administer. This is especially the case when considering when to opt into the scheme. The relief has a fixed time limit and only applies to the profits derived from the individual patented product. As such, if you opt into the scheme too early, then your early losses bringing the product to market may prevent you from gaining sufficient reward once you gain market traction. 

We recommend that if you’re planning to lodge a patent for your product, then hire an informed tax advisor to see whether this scheme will be suitable for your business, and importantly when it should be activated.

Future Fund: Breakthrough

Following on from the success of their Coronavirus funding scheme for startups (“The Future Fund”), the government has launched a new scheme which similarly invests in innovative businesses for a share of equity. 

This scheme is available to businesses who are raising an investment round from the private sector and looking for an additional investor to enter the round. The round size needs to be at least £30million, so this is most suitable for high value Series B+ companies. 

The scheme is administered by a subsidiary of the British Business Bank, British Patient Capital, and the lead investor will make the application, not the business. The best place to find out more is our own short guide to the scheme.

The government aimed their Coronavirus Response Funding into two areas: by funding the employees whose jobs were at risk, and ensuring that businesses maintain liquidity. 

The main Employee Funding scheme, the “furlough scheme”, is still active. However the Business Funding schemes are now closed to new applicants.

Employee Funding 

Coronavirus Job Retention Scheme

Widely known as the “furlough scheme”, the JRS is the government’s support package for employees affected by the economic slowdown. The scheme allows businesses to claim partial wages for the employees they can no longer afford. This income then forms the employees’ living expenses while they remain unemployed. 

The amount of income your employees receive from the scheme will depend on when the claim was made. For the 1st phase of the scheme from March to August 2020, 80% of the employees’ wages were paid by the government up to a £2,500 cap. That has typically been the rebate during national lockdowns. 

More recently the % of pay that the government covers has reduced. For example from 1st July to 1st August 2021, the government covered 70% of employee wages up to a cap. 

There are also some additional complexities to the scheme: for example if your business receives partial public funding, or if your employees are contract workers. The scheme is constantly evolving so be sure to consult the government’s guide to the scheme as it is the most reliable resource.

Coronavirus Job Retention Bonus Scheme

The Bonus Scheme was a planned £1000 cash credit per employee for businesses who maintained furloughed employees on their payroll after the JRS scheme ended. However, the reinstating of the JRS has effectively withdrawn this scheme. It is uncertain if the Bonus will be reinstated as the pandemic eases. The government’s website is the best place to track whether this scheme will be reintroduced. 

Job Support Scheme

The JSS was designed to replace the Job Retention Scheme in November 2020. However, when in response to the national lockdown, this scheme was withdrawn. You can find the government’s guidance on the scheme here.

Business Funding

Loan Schemes

The government ran numerous business loan schemes to help businesses during the coronavirus lockdown. As of March 2021 these have closed for new applicants. 

There were 4 primary loan schemes aimed at helping businesses of all sizes. Bounce Back Loans, CBILS, CLBILS and the CCFF all provided loans at preferential interest rates to struggling businesses. 

Importantly these loans can have an effect on the amount you can receive through the R&D tax credit scheme. We have a guide which provides more detail on that issue. If you’ve taken one of these loans, we also recommend flagging it with your R&D tax credit advisor before you make a claim.

Investment Schemes

Additionally the government launched the Future Fund, which provided equity investments in technology companies. This was replaced by the Future Fund: Breakthrough which we’ve written about.