I wrote last month about the role that venture capitalists play in funding fledgling businesses. These are people who will invest cash in potentially risky but promising start-ups in return for a stake in the company. But there is a bewildering array of other options to get your new firm off the ground, including business angels, grants, loans and incubator programmes.

Another great option is to take advantage of government tax incentives. In the UK, the most useful is the Enterprise Incentive Scheme (EIS), which since 1994 has been providing tax breaks for those taking a risk on – and investing in – qualifying companies. For even earlier investments, there is the Seed Enterprise Incentive Scheme (SEIS). It was launched in 2012 with the ambitious goal to “stimulate entrepreneurship and kick start the economy”.

There is a bewildering array of other options to get your new firm off the ground, including business angels, grants, loans and incubator programmes.

SEIS applies to the first £150,000 invested in a business by outside investors, who can claim back 50% of their cash from Her Majesty’s Revenue and Customs (HMRC) via income tax relief. Even better, if the business succeeds (and the shares are sold at a profit by the investor), the investment is largely exempt from capital gains tax as well. So far over 12,000 companies have received more than £1bn of funding on which investors have received tax relief via the scheme.

As for the EIS, which is for later-stage investments into companies, it allows investors to claim back 30% of their investment via income tax relief. More than 31,000 companies have so far received investment via this scheme, raising some £22bn of funds in the process.

I’m not a financial adviser so do check out the latest official information about both schemes from the UK government website before taking any business decisions. But if you have a new firm, then as soon as you’ve finalized your first draft business plan, I would definitely encourage you to apply for advanced assurance from HMRC to confirm that the proposed investment in the company will qualify for a tax break for future investors, such as business angels.

Securing final confirmation from the HMRC can take several months, so that early assurance could be vital in persuading a would-be investor to plough cash into your business. You can, of course, apply to EIS and SEIS after an investment has been made but getting advanced assurance will reassure potential investors that they will get the tax break. In fact, they might end up investing more than planned.

Credit where credit’s due

Another consideration for a fledgling business is whether to take advantage of research and development (R&D) tax credits. These are great as they reduce the overall cost of R&D projects by allowing companies to obtain tax relief on the money spent on such work. Here in the UK, they were launched in 2000 for small- and medium-sized enterprises (SMEs), before being extended to larger companies in 2002.

In practical terms, R&D tax credits allow companies that have not made a profit in a particular year to receive money from HMRC. The cash can be crucial, especially for early-stage physics-based firms that need to spend a lot on R&D to create a product. In 2017/18 alone, tax credits provided some £5.1bn of support to nearly 60,000 British businesses. For larger and more established companies, such schemes can even influence which countries they locate R&D projects in.

Here in the UK, the government has just completed a consultation on how these schemes can be improved to encourage more investment through them. With an ambitious target to raise total investment in R&D to 2.4% of UK gross domestic product (GDP) by 2027, the government believes that R&D tax reliefs can encourage this investment by cutting the costs of innovation. The Institute of Physics (IOP) has already responded formally after consulting IOP members via its Business Innovation and Growth group.

The IOP has identified areas where the scheme could be improved to benefit physics-based businesses. In particular, there is a concern over what qualifies as R&D, which currently makes the scheme seem inaccessible to many such companies. They have to show how a project “could not be easily worked out by a professional in the field”, which naturally appears to fit with lower levels of technological readiness levels (TRL) and appears more like a patent definition.

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How to persuade a venture capitalist to fund your business

A simpler definition of R&D would also help with the application process, which is so complicated that it has spawned an entire industry of advisers. Usually operating on a “no-win-no-fee” basis, they do a good job. But if you do succeed, you might have to pay them as much as 20% of the benefit gained – money that should be going to fund further R&D. A simplification would also encourage more firms to apply.

As the IOP has stated in its submission, a broader definition of R&D would allow firms to apply for tax credits on much later TRL development costs too. That could be a great benefit for physics-based firms, which often face big risks and costs even when building production lines. Currently those investments wouldn’t count as R&D, which has a much narrower scope.

The consultation is a great opportunity for the UK government to fine tune its R&D tax credit schemes.

Another drawback of the current scheme is that it only applies to money that has already been spent. You can only make a claim once the financial year is over, which means it can take up to 18 months (if your accounts need to be audited) to get any money back on your investment. That can be far too long for a fledgling firm, where cash flow is crucial

But I don’t want to end on a sour note. I do believe the consultation is a great opportunity for the UK government to fine tune its R&D tax credit schemes, which will help to boost the UK economy and increase the global competitiveness of British physics-based businesses. In this post-Brexit era, that’s more important than ever.