All you need to know about grants and R&D tax credits
The evolving landscape of technological innovation means there’s often a need for a cash injection for further development. The application process for funding business expansions, new products or extended services can be intimidating, not least because of the range of funding options open to tech businesses.
We sat down with BDO’s experts Eyad Hamouieh and Hervé Mottais to discuss grants and R&D tax credits, and how founders and company managers can boost their tech business with the right financial support.
What are local growth grants?
Hervé: The core purpose of local growth grants is to use public funding to help businesses grow and innovate. These facilities are similar to other types of funding, such as loans, equity and private funding, but companies have the benefit of not paying the money back.
A business may sometimes need to grow because it has increased capacity, or because it needs to innovate to develop new products and new services to make it more competitive. Those two needs require two different types of funding. If you’re aiming for expansion and growth, you need to invest in capital.
For that, you can use local growth grants, which tend to support up to about 30% of your investment. They can help to support your capital investment and your funding plans, as long as you can demonstrate that as a result of that extension, there will be a creation of jobs.
Eyad: Being innovative isn't necessarily the main reason to get that funding, however. You may be looking to install a new production line, at a cost of a few hundred thousand pounds, with only $150,000 in the bank. However, that production line is going to create 20 jobs. With a solid cashflow, a solid history, and good commercial understanding, you could put in an application and be successful, because you’re creating new job roles. When you recruit employees and pay taxes through PAYE, you stimulate the area, and that’s attractive to governments looking to give funding.
What other types of funding are available?
Eyad: There are project-related grants, and research and development (R&D) tax credits. Examples of the first include the Innovate UK grant and European grants, such as Horizon 2020 and EUREKA. The latter are tax credits that are available to claim by companies doing research. For these types of tax incentives, you have to have an innovative project or idea that you're going to use to apply for the funding. The quid pro quo is money for intellectual property, which will in turn create a commercial benefit to the industry and country as a whole.
For grant funding, your success does depend on what each grant provider is looking to fund, so you may need to consider if you meet that need, or if your business is in the supply chain for that need. These grants are quite competitive, and require accurate documentation, which is where advisory services are recommended.
Hervé: There are two different schemes for R&D tax credits: one for small and medium enterprises (SMEs), and one for large companies. The large company scheme is less beneficial, as it only gives you an R&D tax credit worth 10% of your costs, rather than around a third for an SME.
What are misconceptions surrounding growth funds, grants and funds?
Eyad: It is a common misconception that only tech startups should look for grants. Governments, businesses or other grant providers don't necessarily want to take a risk on a cutting-edge innovative solution or product. Look at S&P 500, FTSE 250 or FTSE 100 businesses; they are just as eager to have an income to help them in their research, just as much as tech startups.
Local growth grants, Innovate UK grants, or even European grants, are open and often biased towards those businesses that have some sort of funding already to help get their project off the ground. Governments always look for an opportunity to get something out of the transaction.
Can tech companies apply for all three types of funding?
Hervé: Yes. There’s a link between them: to be successful, you need to expand and grow your tech business, and this may require a growth fund. Sometimes this requires innovation, which the government will support through grants to develop new products and services that are commercially and technically innovative. You can combine these with an application for R&D tax credits, as these are tax incentives for research.
What do companies have to do to be eligible for growth funds, grants and credits?
Eyad: If you’re receiving a local growth grant, because it is classified as a capital investment or capital grant, it generally has no impact on your R&D tax relief claim. The R&D tax relief counts for revenue spent, and you receive an investment on your capital. You can actually get both at maximum amounts.
As a project-related grant is usually revenue-based, this will potentially conflict with R&D tax credits for SMEs – you’d need to check. If you are an SME, and you receive a project-related grant, you can still claim R&D on that project on the larger company scheme, even though you're not spending your own money. This is a lesser-known tip.
R&D tax credits and grants are compatible schemes. Projects that are partly subsidised will fall under the large company scheme, and self-funded projects will remain under the SME scheme. The important thing is to appoint advisers who can understand these nuances and rules of application, and make the best choices for your business.
What are the caveats and conditions attached to funding?
Hervé: If your business has been backed by a local growth grant, the fund provider would expect the creation of jobs. The rate of job creation would be monitored, even after receiving the money. It means that companies can't be overly ambitious, and need to plan ahead accurately. It’s worth consulting experts to help make sure that businesses draw the line where they should invest or hire. Although you want to be putting numbers forward that are attractive from a grant provider's perspective, you don't want to commit so much that it will get you into trouble if you don’t meet your goals.
For a research grant, objectives for your project are structured in milestones, which have a financial implication. If you don't reach a milestone, that triggers a discussion with the grant provider to see if the money will be spent or not going forward. This is one of the ways in which grant providers manage their risk. The grants are also paid retroactively to avoid potential losses.
How can businesses make themselves more attractive to grant and fund providers?
Eyad: Companies applying for grant funding need to demonstrate their ability to support their investment, or at least, the part that has not been funded. Most grants will not wholly cover all the project costs, hence why businesses need to put forward a viable and sustainable financial plan.
Hervé: There has to be an emphasis on how technically innovative your project is/ What is the benefit is for the whole community? What impact will there be for users? It’s important to consider how the technology will benefit the layperson in the UK, for example. Ensuring you present this to fund providers is critical.
What are the challenges to be aware of?
Eyad: When you’re backed with funding, you are due to meet some specific milestones agreed at the beginning of the project. At the same time, however, you get a very structured project management and guidance from the grant bodies who are protective of their investment, so it does balance out.
Hervé: Timing can be an issue, as applying for these type of grants takes a fair amount of time. Once you've submitted your application, there is an assessment, which may take up to three months. This can delay your project start up to six months. If you’re looking for immediate investment, this type of funding might not be your best option.
There are also some reporting requirements. Every quarter, you’ll need to send some documentation about your costs, and an update on how far you've progressed on your project, because every grant is associated with a list of milestones and objectives that require achievement. If there’s a delay, you need to explain why.
Another requirement is to undergo an audit, because the whole process is self-assessed. You’ll need an independent accountant who can audit the grant at the end of the process, to show that the declaration has been reviewed by an independent party, which will give some reassurance to the taxpayer.
What can you do to maximize your chances for funding?
Eyad: It’s worth considering speaking to a professional to maximise your chances of getting funding, so you can spend your time on the business, rather than the administration. Applying yourself takes time away from staff who would be better utilised for innovation or company management. An external adviser can create a business plan to reuse in future. Professional assistance also helps investors feel more assured about the companies they’re supporting.
Aside from the obvious funding, what are the benefits of undergoing a grant or funding application?
Hervé: When tech companies go through this type of application, it forces them to think about strategy and growth, and the stringent nature of the process means that it’s seen as very positive for private investors. For example, Innovate UK grants need be reviewed by three to five independent expert evaluators in a specific industry before being approved; this is almost like a free-of-charge due diligence process for the VC interested in your project.
What is your final piece of advice to businesses?
Hervé: We want to tell tech businesses this: regardless of your size, whether you are a startup or you're a listed business, shareholders want to make sure businesses are getting all the income they can. It is in your interest, whether it’s through sales or through grants, to seek out that grant income.