Plugdin: All you need to know about grants and R&D tax credits

Read time: 8 minutes

In the last year alone, the UK’s business landscape has experienced two re-defining events: Brexit and the COVID pandemic. Each has had a major impact at ground level, particularly when it comes to investment in industry growth and innovation. In the first instance, as a result of exiting the European Union, we are no longer subject to the control of the European commission for subsidy, putting the government in complete control of the grants and benefits they offer to UK businesses. Meanwhile, COVID has caused a shift in what is required by businesses of all shapes and sizes, exacerbating demand where there was none previously, and pressing pause on schemes that were once highly sought after.

As we emerge into a new landscape of technological innovation, we discuss the grants and R&D tax credits available to UK tech businesses, and provide insight into how founders and company managers can give themselves the best chance of securing funds.

Local growth grants

The government has confirmed their continuous commitment to support businesses and innovators through local grants. The purpose of local growth grants is to use public funding to help businesses grow and innovate. These are similar to other types of funding, such as loans, equity and private funding, except in this case, companies have the benefit of not paying the money back.

As part of the last financial budget, there are a number of new, or relaunching local grants becoming available through two key programmes:

Levelling Up Fund

The Levelling Up Fund has been brought in to promote key investment on infrastructure with the view of increasing opportunities for local communities, driving prosperity and providing people with a sense of pride in their community. The fund has a focus on capital investment, and is available to businesses who can demonstrate tangible economic benefits for their local community, prioritising regeneration and growth in areas of low productivity and connectivity.   

The Fund sits within the wider context of the Chancellors Spending Review of £100 billion of capital spending in 2021-22, a £30 billion cash increase compared to 2019-20. This is part of plans to deliver over £600 billion in gross public sector investment over the next five years. The Levelling Up Fund will deliver as part of a broader package of complementary UK-wide interventions, including:

• The UK Community Renewal Fund: providing local areas with access to a £220 million investment in skills, enterprise and employment in preparation for the UK Shared Prosperity Fund due to launch in 2022
• The UK Community Ownership Fund: targeted at social wellbeing this fund gives communities the opportunity to protect vital community assets by providing funding for local ownership
• The Plan for Jobs: expanding The Department for Work and Pensions (DWP) Jobcentre Plus network to provide more long term support for recovery from the impacts of COVID-19
• The Freeports programme: setting up national innovation hubs for global trade and investment across the UK, driving regeneration, employment opportunities and increased economic activity
• The UK Infrastructure Bank: providing financing support for local authority and private sector infrastructure projects with a focus on climate change and regional economic growth
• The Towns fund: a £3.6 billion injection to drive economic regeneration of town centres and highstreets in deprived towns

Find more information on how to apply for these schemes in the Levelling Up Fund prospectus.

Restart grants

If your tech business has a retail commercial arm, you could be eligible for The Restart Grant scheme, designed to support businesses in reopening safely as COVID-19 restrictions are lifted. 

Eligible businesses in the hospitality, accommodation, leisure, personal care and gym sectors may be entitled to a one-off cash grant of up to £18,000 from their local council.

Eligible business must fulfil the following criteria:

• based in England
• rate-paying
• in the non-essential retail, hospitality, accommodation, leisure, personal care or gym sectors
• trading on 1 April 2021

This scheme is also covered by 3 subsidy “caps”:

• Small Amounts of Financial Assistance Allowance – you’re allowed up to £335,000 (subject to exchange rates) over any period of 3 years
• COVID-19 Business Grant Allowance – you’re allowed up to £1,600,000
• COVID-19 Business Grant Special Allowance - if you have reached your limits under the Small Amounts of Financial Assistance Allowance and COVID-19 Business Grant Allowance, you may be able to access a further allowance of funding under these scheme rules of up to £9,000,000, provided certain conditions are met

Grants under these 3 allowances can be combined for a potential total allowance of up to £10,935,000 (subject to exchange rates).

R&D tax credits

There are huge investments being made in R&D as a result of COVID-19 and Brexit, with technology, innovation and IP tipped to be a big driver for the UK economy in coming years. 

In France and Ireland, for example, it doesn't matter whether you're a large business or an SME business, you're going to get the same rates of tax credit or tax relief, whereas here in the UK we have a tiered system. There are other countries in the world that give you a discount on your employment taxes as an individual, if you are working in industries that are R&D. Again, an incentive to encourage people to go into R&D.

HMRC is currently reviewing the UK’s tax credit system, considering what other activities should fall within the definition of R&D used in the future and whether new classes of costs, such as cloud computing and even capital assets, should be eligible for relief.  The consultation also asks for views on whether R&D relief could and should be used to promote social value, for example the development of green technology and to discourage R&D in certain fields.

What is an R&D tax credit?

R&D reliefs are government initiatives that support businesses working on innovative projects in science and technology, allowing them to claim Corporation Tax relief for approved projects. Eligible projects are not routine and must have an element of challenge where the answer or solution is not obvious or easily obtainable.

There are two types of R&D relief currently available in the UK, depending on the size of your company:

SME R&D relief

Available for small or medium sized businesses, SME R&D relief allows companies to deduct an extra 130% of their qualifying costs from their annual profit, on top of the normal 100% deduction. It also gives tax credit of up to 14% if the company makes a loss.

Eligible companies will have:

• Less than 500 staff
• Turnover under €100m or a balance sheet total under €86m

Research and Development Expenditure Credit (RDEC)

Large companies who are not eligible for SME R&D relief can claim RDEC for relevant innovation projects. SME who have been subcontracted for R&D work by a large company will also be able to apply. From 1^st April 2020 the RDEC tax credit is worth up to 13% of your qualifying R&D expenditure.

Qualifying expenditure for R&D includes:

• Salaries including pension and bonuses
• Subcontractors
• Externally provided workers
• Consumables
• Heat, light and power

How to give your business the best chance of funding

The last year has seen a definite increase in the number of companies applying for grants. Of course, this has been mostly directed at those funds specific to addressing the COVID-19 situation, while some of the regular grants began to dry up in light of government priorities shifting during the course of the pandemic. Moving forward we can hope to see some of these more general funds being reinjected, however competition is likely to remain fierce.

When it comes to securing R&D funds, planning is important. While time is of essence, businesses need to make sure they have the right records and documentation to support whatever claim or application you make. This is an area where it’s a good idea to get professional advice, which could be the make or break in terms of receiving your desired level of funding with the least delay.

What kind of support could BDO offer?

BDO offer a full consultancy service to help your business achieve its full potential. We can provide expert insight and advice to help guide you toward the most applicable grants and funds, and help you prepare your application so it’s in the best possible place to secure funding.

In addition to this, BDO’s Artificial Intelligence (AI) online toolkit can be used to provide an indication of the realistic sum a project might expect to receive before applying, by evaluating a number of key questions:

• Is your R&D tax credit claim in line with your competitors
• How does your claim value compare to the industry sector average?
• Do you understand the risk factors in your R&D claim?
• Can you identify specific claim opportunities?

It only takes minutes to complete the online survey and receive your customised  bench-mark report. To access the toolkit or learn more about BDO can help you maximise your chances of a successful R&D claim, email plugdin@bdo.co.uk.

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