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UK’s checklist for supporting innovation in companies

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The UK seeks to attract and retain “yollies” (young leading innovators) within its shores by offering a number of incentives ranging from grants to tax incentivisation.  Innovation appears to be on the forefront of people’s minds these days, and the UK government wants to assist at the seed/early stage of growth, when the company is most vulnerable.  There are three governmental institutions that are driving innovation, namely the Technology Strategy Board (“TSB”), regional business development agencies such as the Northwest Regional Development Agency (“NWDA”) or Invest Northern Ireland (“INI”), and Her Majesty’s Revenue and Customs (“HMRC”).

TSB is the UK’s innovation agency offering support and funding to help early stage businesses which develop new products and services in order to bring them closer to being marketed.  TSB provides financing through competitions and grants. Regional business development agencies such as INI or the NWDA aim to grow their local economy by promoting international competition and attracting new investment to their region. HMRC, the UK’s tax authority, is primarily responsible for making sure that “the money is available to fund the UK’s public services and for helping families and individuals with targeted financial support”.

The following is a summary checklist of incentives offered by the above UK institutions to assist small medium enterprises ("SMEs") that are currently in their seed/early stage.

 

 

Incentives

Form of support

1  

Smart Grants

R&D grant funding

2

SBRI Competitions        

Governmental contracts awarded to SMEs

3

Regional grants

Selective financial assistance in the form of grants

4

UK Patent Box

Tax relief on income associated with intellectual property

5

R&D Tax Credit

Tax credit on research and development costs

6

SEIS / EIS

Tax relief for investors

 

Below is a synopsis of the above incentives including their advantages and drawbacks to companies.

  1. Smart Grants:

What is it?

The Small Firms Merit Award for Research and Technology is a TSB funding vehicle to assist SMEs’ R&D efforts.  There are three levels of potential funding that will allow companies to obtain partial funding to explore market potential for technology, development of functional prototypes to validate the technology, refinement and testing of design.

Why is it so attractive?

These grants can close the funding gap during the seed stage or early stage without dilution of equity.  Awards of up to £250k may be made to support prototype development. They constitute State Aid, however they are offered under a notified exempt permission, thereby not counting towards the de minimis allowance of companies and thus can qualify for R&D tax credits. They do not have defined topics like SBRIs do and have a regular submission timeline (every two months there is an open call to submit proposals to Smart that can cover a wide range of topics). 

What are the drawbacks?

They are very competitive as a very high number of applications are typically submitted. In order to obtain the grant the company must prove that the technology produces a highly innovative solution that doesn’t merely lead to incremental improvement.  Smart grants work under the match funding principle which means that they cover only a percentage of the total project’s spend, and therefore cannot be the sole method of funding the project.  Also, the grant money is reimbursed after it is spent which may not assist with the company’s liquidity and may even complicate the cash flow management process.

  1. SBRI Competitions

What is it?

SBRI is the Small Business Research Initiative which “connects public sector challenges with innovative ideas from industry, supporting companies to generate economic growth and enabling improvement in achieving government objectives”. The competitions are offered by the TSB and there are a number of competitions open at any given point in time. The program has been described as an imitation of the SBIR program based in the United States that was rolled out in the 1980s and hailed as very successful. Unlike the US SBIR program which is restricted to just small businesses, SBRIs in the UK are open to any size company.

Why is it so attractive?

These competitions help provide a route to market by providing a major contract (not a grant) with a lead cornerstone customer.  Contracts tend to be higher in value than Smart (or equivalent) grants, are 100% funded and do not require matching funds. All intellectual property developed under the contract is owned by the company that performs the work. There is also no loss of equity and it can help bridge the seed funding gap, providing companies with sufficient runway to fully develop and evaluate prototypes of their technology. SBRI contracts can also qualify for R&D tax credits.

What are the drawbacks?

The competitions are highly competitive with award rates typically being around 10% of applications. Small companies may have to compete with better resourced large companies on certain topics which can lead to higher overhead to develop a competitive proposal. Unlike Smart grants which have an open call, the competitions are themed calls focused on a particular type of technology or the solution to a particular problem. This can mean that it is difficult to predict when a call suited to your technology may emerge. Calls traditionally have been somewhat sporadic and infrequent, however frequency and volume of calls has increased significantly in the last 12 months and will continue to do so as the program expands.

  1. Regional Grants

What is it?

Regional business development agencies such as Invest Northern Ireland or Northwest Regional Development Agency provide a number of funding options for businesses with operations based in the region.  There is funding for capability development, employment, innovation and R&D. A business case is required to be submitted which gets evaluated.  For example, INI has supported many companies to locate operations in Northern Ireland and there have been notable blue chips such as the New York Stock Exchange and Citigroup that have established operations in Belfast in the past few years.

Why is it so attractive?

The assistance is grant support and therefore does not dilute equity.  Regional R&D grants are typically less competitive than Smart Grants, increasing chances for award. 

What are the drawbacks?

Award of regional grants may prevent the company from also obtaining Smart Grants (or vice versa) for the same technology as the company is prevented from using two different sources of grants to do essentially equivalent work. This means companies cannot use regional funds to meet the match funding requirement of, say, Smart grants. R&D tax credits may also be affected should the regional grant be awarded for R&D support and the monies offered are deemed as notified State Aid.  Companies must also be based in the region in order to be able to obtain the assistance. Like the Smart grants, regional grants follow the matching principle and as such do not fully fund projects. Regional grant money is also typically reimbursed after it is spent which may not assist with the company’s liquidity and may even complicate the cash flow management process.

  1. UK Patent Box

What is it?

The UK Patent Box is effectively a reduction of the corporate tax rate to 10% on income generated from “qualifying intellectual property”.  The purpose of the regime is to encourage innovation in the UK and to attract highly skilled labour into the country. For further information download our free eBook "The Entrepreneurs Guide to the UK Patent Box".

Why is it so attractive?

The incentive is currently very generous as it is applicable to patents registered prior to the regime’s introduction in 2013 and it provides relief on product profits, not only on patent profits.

What are the drawbacks?

There is a cost benefit trade-off to be made when deciding whether to opt into the regime mainly due to high advisor costs for the filing.  The regime is also currently under review by the European Commission due to it being criticised as promoting “harmful tax competition”.  Some changes are expected to be made due to political pressure from neighbouring countries; however, it is expected that the Patent Box will remain in the marketplace in one shape or other.

  1. R&D Tax Credits for SMEs

What is it?

R&D tax credits are corporate tax deductions for qualifying expenditure which are designed to encourage investment in R&D.  SMEs can deduct 225% of eligible R&D costs from their taxable income.

Why is it so attractive?

R&D tax credits are generous credits.  Also, loss makers can surrender the losses for a payable tax credit.

What are the drawbacks?

If you receive State Aid in the form of a grant or subsidy, you may not be able to claim the R&D tax credit, unless otherwise specified.  However, for TSB Smart grant programs and SBRI contracts SMEs may claim R&D tax relief at the lower large company rate of 130%.

  1. Seed Enterprise Investment Scheme and the Enterprise Investment Scheme

What is it?

The Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) are government plans put in place to help SMEs raise equity by providing a number of tax reliefs to investors who purchase new shares in qualifying companies. For further information on SEIS download our free eBook "The Entrepreneurs Guide to Seed Enterprise Investment Schemes"

Why is it so attractive?

The relief is very generous to investors, providing 50% income tax relief for SEIS qualifying investors and 30% for EIS qualifying investors, 100% capital gains tax relief and 100% inheritance tax relief after two years, thereby encouraging investment in early stage SMEs.

What are the drawbacks?

Certain trades are excluded (such as dealing in land or providing legal or accounting services).

There are a number of other incentives that are in the process of being approved that would further support innovation and the localisation of high growth SMEs into the UK, such as the reduction in corporate tax rate for Northern Irish companies to a rate of 12.5% which would make Northern Ireland competitive with the neighbouring Republic of Ireland, and the revamp of UK state pensions that would provide people with access to their savings and increase spending and/or investment. Indeed, it is an exciting time to be starting a company in the UK.

 UK Support for Innovation FREE eBook

 

Written by Vasiliki Carson and Ronan Cunningham

What is Sapphire?

 
  Vasiliki Carson 
 
 

    Co-authored by Vasiliki Carson

As a partner at Sapphire Capital Partners LLP, Vasiliki specialises in advising clients in regard to Patent Box as well as SEIS and EIS schemes, writing business plans and financial models for clients. Prior to co-founding Sapphire Capital, Vasiliki was with PwC and Goldman Sachs in Tokyo and New York. Contact her by email at vasiliki@sapphirecapitalpartners.co.uk or view Vasiliki's full profile here.
 

 
  Ronan Cunningham 
 
 

    Co-authored by Ronan Cunningham

Ronan is the Founder and Owner of Banbatech. A technology advocate with a passion for figuring out how to help engineers and scientists turn their ideas into reality, Ronan has almost two decades of experience in mechanical and aerospace engineering, technology development, project management, business development, and sales.  Prior to founding Banbatech, he was Director of New Technology Development and Director of Business Development for ATA Engineering in San Diego, California. He holds a Masters degree in Aeronautics and Astronautics from the Massachusetts Institute of Technology and a Bachelor’s Degree in Mechanical Engineering from the National University of Ireland Galway. Contact him by email at ronan.cunningham@banbatech.com

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