Balancing Venture Capital and Innovation Funding in Europe and the UK

CFOs and founders increasingly recognise that growth cannot be fuelled by equity alone. The most successful scale-ups blend venture capital with non-dilutive funding, such as R&D tax relief, innovation grants, and government-backed loans. This strategy reduces dilution, extends runway, and validates technology in ways that strengthen investor confidence and speed market entry.

This guide sets out a CFO playbook for combining funding sources across the UK and Europe, with FI Group’s global-local delivery model ensuring compliance and consistency at every step.

 

What is a balanced innovation funding strategy?

A balanced innovation funding strategy deliberately mixes private equity with non-dilutive instruments. These include:

• R&D tax relief – a retrospective cash benefit for qualifying research and development
• Innovation grants – competitive awards from bodies like Innovate UK or Horizon Europe
• Innovation loans – long-tenor, below-market debt targeted at scaling innovations

The goal is to make each pound of equity raised work harder, while reducing burn rate and aligning milestones with investor expectations. A balanced approach also provides external validation, as competitive grants and compliant R&D claims send strong quality signals to boards, auditors, and shareholders.

 

Why blend venture capital with public funding?

1. Extend runway and preserve ownership

Every pound of grant or tax credit is a pound you do not need to raise in equity. This means more milestones can be reached without handing over additional equity, helping founders and early investors keep control.

2. Strengthen investor confidence

Winning competitive grants or loans demonstrates external validation of your technical and commercial plans. Many schemes even co-invest alongside private equity, increasing round sizes and reducing investor risk.

3. Accelerate development and market entry

Blended funding allows companies to progress on multiple fronts simultaneously; hiring, prototyping, regulatory approvals, all of which shortens time to market and strengthens exit potential.

 

The UK and European funding landscape

 

 

Venture capital remains the largest pool of growth finance, with the UK consistently leading Europe and attracting nearly one-third of European deal volume. Despite market cooling since the record highs of 2021, deal sizes remain structurally larger than in the mid-2010s, with deep-tech and life sciences attracting outsized investor interest.

Since 2021, however, VC investment across Europe has declined year-on-year, reflecting global market corrections and greater investor caution. In contrast, government innovation funding has steadily increased, with the UK and France leading in absolute levels and Germany, Italy, and Spain expanding their support each year. This divergence highlights the stabilising role of public funding, enabling companies to sustain innovation momentum even as private markets tighten.

 

 

R&D tax relief is a significant driver of innovation. In 2022–23, HMRC reported around £7.5 billion of support across 65,000+ companies, confirming its material cash impact for innovative firms.

Innovation grants and loans fill critical funding gaps. Innovate UK alone deploys hundreds of millions annually through thematic competitions, with Innovation Loans offering up to £25 million per round for late-stage R&D where banks will not lend.

European programmes such as Horizon Europe and Eurostars provide collaborative cross-border funding, making international consortium-building a strategic tool for UK firms.

 

The CFO playbook: funding instruments by objective – venture capital and innovation funding

Objective	Best-fit mechanism	How it helps	CFO watch-outs
Prove feasibility or early prototypes	Grants (Innovate UK, Horizon Europe)	Non-dilutive. External validation. Milestone discipline.	Competition intensity, reporting obligations, co-funding ratios
Reduce quarterly R&D burn	R&D tax relief	Offsets a portion of eligible costs. Improves P&L optics.	Eligibility definitions, documentation standards, enquiry risk
Bridge to commercial scale	Innovation loans	Patient debt for pre-revenue scale-up or pilot production	Repayment terms, competition deadlines, project viability tests
Accelerate growth and international roll-out	Venture capital	Provides scale, governance, networks, and follow-on capital	Dilution, milestone pressure, board oversight

 

Sequencing: when to use which instrument

Pre-seed and Seed: validate the science

• Focus: De-risk technical uncertainty and achieve proof of concept.
• Mix: Early-stage grants and R&D tax relief on internal costs.
• Outcome: Investor-ready validation with minimal dilution.

Series A: product validation and trials

• Focus: Prototypes, pilots, or regulatory submissions.
• Mix: Collaborative grants, R&D relief on engineering sprints, modest equity round.
• Outcome: Stronger valuation uplift and reduced investor risk.

Series B and growth: scale to market

• Focus: Pilot production, system integration, or late-stage trials.
• Mix: Innovation loans bridging capital expenditure, supplemented by R&D relief.
• Outcome: Quicker commercial readiness at lower cost of capital.

Expansion and internationalisation

• Focus: Market roll-out and localisation.
• Mix: Equity plus targeted use of local incentives across jurisdictions.
• Outcome: Harmonised global funding strategy coordinated through one advisor.

 

Risk, compliance, and reporting: what can go wrong with venture capital and innovation funding

Innovation funding is not without risk. Common issues include:

• Inconsistent documentation across subsidiaries, increasing audit exposure
• Missed opportunities due to fragmented ownership of funding strategy
• Financial reporting challenges, particularly how incentives flow through P&L and tax lines

The solution is to adopt a single-point global framework:

• Eligibility gateways ensure consistency across all projects.
• Evidence capture is standardised at the point of work, with logs, timesheets, and design records.
• Audit-ready narratives anticipate regulator questions, reducing enquiry risk.

This structured approach saves CFOs time, improves board-level clarity, and avoids painful rework.

 

International perspective: Global reach, local expertise

Managing incentives across multiple jurisdictions requires both global oversight and local compliance expertise.

FI Group operates a single point of contact model, supported by local engineers, tax specialists, and grant writers in the UK, EU, USA, South America, and Singapore. This ensures:

• Consistency of claims across entities
• Local compliance with tax and grant authorities
• Strategic alignment between HQ planning and local execution

As we like to say: “Your HQ sees the full picture. Your teams feel the local support.”

 

How FI Group delivers for you

FI Group’s consultants combine technical depth with fiscal expertise, meaning the same team that understands your codebase or laboratory work also knows the exact evidence HMRC, Innovate UK, or the European Commission expect.

Our approach:

• Interview-based project mapping to capture technical uncertainties and advances
• Audit-ready narratives to defend claims if challenged
• Sequencing advice to align grants, loans, tax relief, and equity rounds

“When we blend grants, R&D relief and equity at the right moments, clients maintain velocity without unnecessary dilution. The art is sequencing: validate with public funding, monetise costs through R&D relief, then raise equity against a stronger story.” – Dr. Fawzi Abou-Chahine, Funding Director, FI Group UK

 

Worked venture capital and innovation funding example: UK deep-tech SME

1. Phase 1: Secure Innovate UK grant for risky scientific development.
2. Phase 2: Claim R&D relief on self-funded eligible costs, improving cash flow.
3. Phase 3: Apply for Innovation Loan to finance pilot production and regulatory approval.
4. Phase 4: Raise Series A equity with non-dilutive funding already extending runway, compressing investor risk, and supporting a higher valuation.

 

What you need to know about combining venture capital and innovation funding:

What is non-dilutive funding?

Non-dilutive funding is capital that does not require giving up equity, such as grants, R&D tax relief, or innovation loans. It complements venture capital by reducing burn and extending runway.

Can grant-funded projects still claim R&D relief?

Yes, many grant-funded projects can still claim R&D relief on self-funded eligible costs, provided claims are structured correctly with the right evidence.

What are Innovate UK Innovation Loans?

Innovation Loans are long-term, low-interest loans offered by Innovate UK to support late-stage R&D and commercialisation. They typically allocate up to £25 million per round to innovative UK SMEs.

How big is the UK’s R&D tax relief scheme?

In 2022–23, HMRC reported around £7.5 billion of support through R&D tax relief, benefitting more than 65,000 companies.

 

Checklist for CFOs

• Map each project to the correct funding instrument
• Sequence decisions so grant awards or claims land before equity rounds
• Standardise documentation and eligibility rules across all entities
• Capture evidence at the point of work
• Appoint one accountable partner to coordinate multi-country claims

 

FAQs

Does public funding deter VCs?

No. In fact, public support usually de-risks rounds and validates the technical merit of your project.

Are innovation loans a substitute for equity?

No, but they act as a bridge for late-stage R&D where banks will not lend, reducing dilution before equity raises.

What is the main compliance risk with incentives?

Inconsistent definitions and poor evidence trails. Without structured governance, claims are vulnerable to enquiry.

How does FI Group reduce internal workload?

We manage technical interviews, documentation, and regulator questions so your teams can stay focused on delivery.

 

Turn complexity into clarity. Fast. Speak to FI Group about structuring a blended funding roadmap across the UK and Europe. We ensure your equity, grants, tax incentives, and loans are sequenced for maximum value.

Global reach. Local expertise. Your HQ sees the full picture. Your teams feel the local support.

Quantum Computing and Public Funding: Where the UK and EU Are Heading

Quantum computing funding has become a strategic priority on both sides of the Channel, spurring a wave of public grant programmes between 2023 and 2025. In the United Kingdom and across the European Union, governments are investing heavily to support quantum startups, collaborative R&D projects, and innovation ecosystems. These funding initiatives target everything from cutting-edge quantum hardware and networks to applied quantum sensing and communications. They come with ambitious goals – such as fostering quantum sovereignty and securing supply chains – and they present significant opportunities for companies in the deep tech and research-heavy SME space.

This report provides a comprehensive overview of major UK and EU quantum funding programmes launched or active in 2023–2025. It highlights the types of projects and companies being targeted, the funding amounts and structures, key deadlines, and strategic policy objectives. It also includes insights from Dr. Fawzi Abou-Chahine – Funding Director at FI Group UK – on navigating these opportunities, and discusses implications for CFOs of quantum startups and scale-ups.

The UK Quantum Funding Landscape

The UK has dramatically ramped up public Quantum Computing Funding through a National Quantum Strategy backed by £2.5 billion of funding over ten years. This builds on earlier investments of £1 billion since 2014 and reflects a determination to make the UK a “leading quantum-enabled economy.” In late 2023, the government launched five Quantum Missions with concrete goals:

• Mission 1: Quantum Computers – By 2035, develop UK-based quantum computers capable of 1 trillion error-free operations.
• Mission 2: Quantum Networks – By 2035, deploy the world’s most advanced quantum-secure communication network.
• Mission 3: Quantum Sensing in Healthcare – By 2030, ensure every NHS Trust benefits from quantum sensing technologies.
• Mission 4: Quantum Positioning, Navigation and Timing (PNT) – By 2030, deploy high-accuracy quantum clocks and navigation devices to reduce reliance on GPS.
• Mission 5: Networked Quantum Sensors – By 2030, develop mobile quantum sensors that enhance situational awareness across sectors.

These missions signal the UK’s strategic priorities, from computing sovereignty to national security, and they are backed by targeted Innovate UK grant calls.

Innovate UK Quantum Computing Funding Competitions

• Quantum Missions Pilot (2024–25): This competition awarded over £12 million across ten Quantum Computing Funding projects. Grants ranged from £300,000 to £3 million per project, with SMEs required to co-fund 30–50 percent of costs. Funded projects included efforts by Oxford Ionics, Rigetti UK, and BT with Toshiba Europe to advance scalable quantum computing and quantum-secure communications.
• Quantum Sensors and Timing (2025): This £14 million programme supported feasibility projects in healthcare sensing, resilient navigation, and quantum clocks. Contracts of up to £1.5 million were awarded to organisations developing prototypes directly aligned with Missions 3, 4, and 5.
• Beyond Innovate UK, the Advanced Research and Invention Agency (ARIA) also offers a more flexible, high-risk channel of funding for radical “moonshot” quantum research, complementing mission-driven calls.

Horizon Europe and Pan-European Quantum Computing Funding

On the European Union side, Horizon Europe (2021–2027) remains the flagship programme for quantum R&D. With a budget of €95.5 billion, it funds collaborative projects across computing, communications, sensing, and quantum simulation. The EU has also extended the Quantum Flagship, a €1 billion initiative launched in 2018, and between 2019 and 2025 has invested more than €11 billion in quantum technologies.

Notable initiatives include:

• EuroQCI (Quantum Communication Infrastructure): Developing a continent-wide quantum-secure network via terrestrial and satellite links by 2027.
• Quantum Computers and Simulators: Projects such as OpenSuperQPlus are building prototypes of 100+ qubit systems within Europe.
• Quantum Centres and Testbeds: New excellence centres and HPC integration projects link quantum processors with Europe’s most powerful supercomputers.

A European Quantum Strategy announced in 2025 introduced plans for a Quantum Act in 2026 to unify fragmented efforts, fund six pilot quantum chip production lines, and launch a Quantum Skills Academy. The overarching goal is to reduce dependence on US and Chinese technologies and strengthen Europe’s industrial capacity.

European Innovation Council (EIC)

The EIC Pathfinder provides grants of €3–4 million for exploratory research, while the EIC Transition offers €2.5 million per project for proof-of-concept and prototyping. In 2024, five quantum startups received Transition grants. The EIC Accelerator, meanwhile, combines up to €2.5 million in grant funding with equity of up to €15 million. In 2024, four quantum SMEs – including SemiQon, eleQtron, and Delft Circuits – secured Accelerator awards worth between €12 million and €17.5 million.

Comparison of Major Quantum Computing Funding Schemes (2023–25)

Programme	Focus	Typical Support	Timeline
UK Quantum Missions Pilot	Computing and networks R&D aligned with Missions 1 and 2	£300k–£3m grants; ~50–70% of costs covered	Call in late 2024; projects run into 2026
UK Quantum Sensors & Timing (PNT)	Healthcare, navigation, timing, critical infrastructure	£0.5–1.5m contracts, 100% funded	May–July 2025; Phase 2 from 2026
Horizon Europe Calls	Collaborative consortia across quantum computing, sensing, comms	€3–10m per project, 100% funded	Annual calls through 2027
EIC Pathfinder	Early-stage exploratory science	€3–4m per project	2–3 calls per year
EIC Transition	Prototype development and proof of concept	~€2.5m per project	Ongoing calls; 2024 funded 5 projects
EIC Accelerator	Scaling and market entry for SMEs	Up to €2.5m grants + €15m equity	Quarterly cut-offs; 4 quantum SMEs funded in 2024

Strategic Goals

Both the UK and EU share a focus on quantum sovereignty and secure supply chains. The UK is building domestic capacity in hardware and communications, while the EU is creating a unified ecosystem to reduce reliance on foreign suppliers. Both regions link quantum investment directly to economic security, talent development, and industrial leadership.

Implications for CFOs

For CFOs of quantum startups and deep tech SMEs, these Quantum Computing Funding programmes provide unprecedented access to non-dilutive capital, but they also demand careful planning:

• Integrate grants into financial strategy – use them to de-risk high-cost R&D and extend runway.
• Prepare for match-funding and audits – ensure resources are available for co-investment and compliance.
• Plan ahead – maintain a calendar of calls, as application windows are often short.
• Leverage cross-border opportunities – UK’s renewed access to Horizon Europe opens doors for international consortia.
• Align with strategic impact – proposals should demonstrate not only technical progress but also societal or industrial benefit.

As Dr. Fawzi Abou-Chahine of FI Group UK notes, “companies that succeed are those that challenge the status quo with ambitious ideas, while staying grounded in execution.” For finance leaders, public funding is no longer a peripheral opportunity but a central plank of growth strategy in quantum technologies.

Conclusion

Between 2023 and 2025, the UK and EU have created an unprecedented funding environment for quantum computing. From Innovate UK’s mission-driven competitions to Horizon Europe’s pan-European collaborations and the EIC’s deep-tech scale-up awards, billions of pounds and euros are flowing into the sector. For CFOs, the challenge is to navigate this landscape proactively, align funding with company strategy, and use grants not just as financial lifelines but as platforms to build credibility, partnerships, and long-term leadership in quantum innovation.

 

R&D Enquiry Success Story – FIMATIX

FIMATIX is a technology consultancy specialising in digital transformation solutions for the public and private sectors. Their expertise spans software development, data solutions, and service delivery, with a strong track record in delivering complex, high-value technology projects.

FIMATIX partnered with FI Group to prepare and submit an R&D tax relief claim that accurately captured their innovation activities while complying with HMRC’s requirements.

The Challenge

Shortly after the claim submission, FIMATIX was selected for an HMRC compliance check. This is a rigorous process that can place significant demands on a company’s time and resources. In this case, the enquiry lasted 18 months, requiring:

• Detailed technical explanations of sought technological advances and associated uncertainties across multiple software projects
• Relevant arguments to prove qualifying R&D activities
• Explanation of financial analysis and claimed costs
• Communication with relevant stakeholders and caseworkers at HMRC. Without experienced representation, many businesses face reduced claims or rejections. The priority was protecting R&D tax credits while ensuring HMRC had complete clarity on the work FIMATIX had undertaken.

Our Approach to R&D Enquiry Success

FI Group’s R&D Tax Lead for Software & IT, Gabriel Aduculesei, led the defence process. Gabriel brought a combination of deep technical expertise in software and a strong track record of successfully handling HMRC enquiries.

Our structured approach included:

• Immediate meeting with client to discuss plans forward and identify blockers to our response.
• Follow-up summarisation of next steps, including deadlines and required input from client
• Proactive engagement with HMRC and client to ensure a response is being prepared in a timely manner.
• Completion of entire enquiry response and review with client.
• Submission and post-response support & HMRC chasing.

FI Group maintained close communication with FIMATIX leadership team, ensuring they were supported, informed, and confident throughout the process.

The Outcome of the R&D Enquiry

Following 18 months of detailed scrutiny, HMRC approved the FIMATIX R&D claim in full. This was a clear R&D enquiry success story, demonstrating that a well-prepared and expertly defended claim can withstand even the most thorough HMRC review.

Client Testimonial

“We have been incredibly impressed with FI Group and the support they have provided as our R&D tax advisors. From the outset, they helped us carefully identify the qualifying elements of our projects, guiding us with clear advice and deep technical understanding.

Throughout the claim compilation process, their team was proactive, thorough, and always available to answer any questions we had.

What truly set FI Group apart was their exceptional commitment during an unexpected HMRC compliance check. Over an 18-month period, they stood by us, offering expert guidance, detailed documentation, and constant reassurance. Their dedication and professionalism went far beyond what we expected, and were instrumental in achieving a positive outcome.

We would not hesitate to recommend FI Group to any business looking for knowledgeable, responsive, and genuinely committed R&D tax advisors.” – Tim Howarth, CEO of Fimatix

Why It Worked

The R&D enquiry success was achieved through:

• Deep sector expertise in software and IT R&D claims
• Meticulous documentation ensuring no aspect was left unaddressed
• Proactive defence strategy anticipating HMRC’s requirements
• Close client collaboration for complete accuracy and transparency

Consultant Insight

“When HMRC opens a compliance check, preparation and clarity are everything. Our role is to ensure HMRC fully understands the technological advances and uncertainties the client has addressed. By combining technical precision with clear communication, we help protect R&D tax credits and ensure innovative work is recognised.”
– Gabriel Aduculesei, R&D Tax Manager, Software & IT

Frequently Asked Questions

How long does an HMRC R&D tax enquiry take?

An HMRC R&D compliance check can last from a few weeks to over a year, depending on complexity. In FIMATIX case, the process took 18 months for R&D enquiry success. Expert representation can help reduce delays.

Why might HMRC open an enquiry into an R&D tax claim?

Reasons can include inconsistencies in submissions, large claims relative to the business size, or lack of sufficient technical evidence. Some checks are also random.

How can I prepare for an HMRC R&D compliance check?

Ensure your claim is accurate, supported by robust evidence, and written in language HMRC understands. Working with FI Group ensures your claim is compliant and ready for any scrutiny and ensures HMRC R&D enquiry success.

What happens if HMRC challenges my R&D tax claim?

You may be required to supply more documentation and technical detail. FI Group manages the process, engages with HMRC directly, and defends your claim to secure the best possible outcome.

UK R&D Spending Decline Raises Questions for Growth Ambitions

Recent analysis has revealed that UK R&D spending has fallen by £2.8 billion in real terms since 2021, sparking concerns over the nation’s long-term growth ambitions. As the government continues to promote innovation-led recovery, this downward trend threatens to undermine competitiveness, productivity, and the ability of UK businesses to commercialise cutting-edge research.

Against this backdrop, advisory firms such as FI Group, specialists in R&D tax incentives and grant funding, are urging companies to act strategically to maintain momentum in innovation.

The Market Context: Why R&D Investment Matters

Globally, research and development is a recognised driver of productivity and competitiveness. According to OECD data, every £1 invested in R&D can generate multiple pounds in economic growth through knowledge transfer, commercialisation, and new business creation.

For the UK, where sectors such as life sciences, aerospace, energy, and digital technology underpin the industrial strategy, sustained investment is essential. Yet recent figures show businesses have scaled back spending in real terms, at a time when other countries, including Germany and the United States, are intensifying their R&D commitments.

Challenges Behind the Decline

Several factors are contributing to the contraction in UK R&D expenditure:

• Inflationary pressures reducing the real value of corporate and public investment.
• Uncertainty around tax incentives, including reforms to the SME scheme and the merged RDEC model.
• Global competition, with firms shifting activity to regions offering more generous incentives.
• Economic headwinds, leading many companies to cut or delay innovation projects.

Without intervention, these challenges could limit the UK’s ability to meet its target of becoming a science and technology superpower by 2030.

Opportunities for Businesses

Despite the decline, opportunities remain for firms willing to be proactive. Businesses can:

• Leverage R&D tax relief under the new merged scheme and the Enhanced R&D Intensive Support (ERIS) for loss-making SMEs.
• Apply for Innovate UK grants such as Smart Grants, Biomedical Catalyst, and the Industrial Energy Transformation Fund.
• Collaborate internationally through Horizon Europe, Eurostars, and other European funding streams, which the UK continues to access.
• Optimise innovation portfolios by balancing long-term research with projects closer to commercialisation.

FI Group’s International Grants Guide 2025 highlights that public-private partnerships and European programmes remain accessible to UK firms, offering significant non-dilutive support for R&D investment.

FI Group Insight: Expert Guidance Amid Change

According to Dr. Fawzi Abou-Chahine, Funding Director at FI Group UK, companies must take a strategic approach:

“Falling R&D spending is a wake-up call for businesses. By combining tax incentives with national and European grants, firms can offset inflationary pressures and maintain their innovation trajectories. The key is aligning projects with funder priorities and presenting compelling technical and commercial cases.”

With over 15,000 clients supported worldwide and £1.7bn in funding secured annually, FI Group provides both technical and financial expertise to help companies navigate complex R&D frameworks.

Actionable Next Steps

For UK businesses concerned about declining R&D budgets, immediate steps include:

1. Review project portfolios to identify eligible activities for R&D tax relief.
2. Benchmark against competitors to understand where international incentives may provide an edge.
3. Engage early with grant competitions, ensuring applications align with funder expectations.
4. Seek expert advice to maximise claims and reduce compliance risk.

Companies looking to safeguard their innovation strategies can explore FI Group’s dedicated services on R&D tax credits and UK grant competitions.

 

What are the top reasons why HMRC challenges R&D tax credit claims?

R&D tax relief is a valuable incentive for UK businesses investing in innovation, yet HMRC is becoming increasingly vigilant in reviewing claims. There have been changes in how HMRC challenges R&D tax credit claims and the number of compliance checks has risen sharply, with enquiries now averaging more than 240 days to resolve, and over three quarters of claims reduced during the process. Understanding the common HMRC enquiry reasons can help companies avoid costly delays, reduced claims, and reputational damage.

This article explores the top five HMRC red flags, why they arise, and how to safeguard your R&D claim defence with insights from FI Group’s specialist team.

1. Insufficient or Poor-Quality Technical Evidence

HMRC requires clear, detailed evidence showing how your project meets the definition of R&D under the BEIS Guidelines. Missing or vague descriptions of technological or scientific uncertainty, methodology, and results often trigger an enquiry.

How to avoid it:

• Document the project from day one, including design iterations, testing stages and results.
• Involve technical staff in drafting reports, not only finance teams.
• Use structured narratives that align with HMRC’s criteria for “competent professional” input.

2. Over-Claiming or Misclassifying Costs

Common errors include claiming for non-qualifying activities, apportioning costs incorrectly, or including general overheads without justification. HMRC pays close attention to categories such as software licences, consumables, subcontractor costs, and staff time.

How to avoid it:

• Apply robust apportionment methodologies and maintain clear usage records.
• Ensure only qualifying costs directly linked to eligible R&D are included.
• Use industry benchmarks and HMRC guidance to validate assumptions.

3. Inaccurate Subcontractor and Externally Provided Worker (EPW) Treatment

Many claims fail due to misunderstanding the rules on subcontracted R&D and EPWs. This is especially important when considering the different treatment under SME and RDEC schemes, and the restrictions on overseas contractors from April 2024.

How to avoid it:

• Identify whether contractors are connected or unconnected, as this affects the percentage claimable.
• Keep contracts and statements of work that outline the R&D element.
• Ensure location-based restrictions are factored into your claim planning.

4. Misinterpretation of What Qualifies as R&D

HMRC often challenges claims where the activities are routine, commercially driven, or fail to address a genuine technological uncertainty. Projects that involve customisation or implementation without underlying technical advancement are particularly scrutinised.

How to avoid it:

• Review all activities against HMRC’s definition before including them.
• Focus on explaining the scientific or technological advance, not just the commercial outcome.
• Consider a pre-submission technical review by an R&D tax specialist.

5. Inadequate Record-Keeping and Governance

A lack of contemporaneous records such as timesheets, invoices and project logs can undermine your position in an enquiry even if the R&D work took place. HMRC also expects evidence of strong governance over the claim process.

How to avoid it:

• Implement regular project tracking and cost allocation systems.
• Store supporting evidence centrally and securely.
• Assign claim oversight to a senior staff member to ensure consistency.

FI Group Insight: Enquiry Defence in Practice

At FI Group, enquiry defence is a core part of our R&D tax credit service. For example, Ryan Haines, R&D Tax Manager, has successfully defended multiple HMRC enquiries, combining engineering expertise with claim compliance strategy. His approach integrates early risk assessment, thorough technical narratives and proactive liaison with HMRC, often resolving issues before they escalate.

Actionable Next Steps for Businesses

1. Review your last claim for any of the red flags above.
2. Strengthen documentation for all current and future R&D projects.
3. Engage a specialist to review your claim before submission, particularly if your sector is under higher HMRC scrutiny.

FI Group’s experts combine sector-specific technical knowledge with a deep understanding of HMRC’s compliance focus. Whether you need a robust R&D claim defence or strategic advice to avoid enquiries altogether, we can help you protect and maximise your innovation funding.

Speak to an R&D Tax Expert at FI Group

Venture Capital and R&D Investment: Mapping the UK Innovation Landscape

Launching a tech-driven or R&D-focused business in the UK is no small feat. Between refining your product, attracting talent, and securing investment, founders are constantly juggling priorities. In this high-stakes environment, understanding how venture capital and R&D investment intersect is essential for maximising growth and minimising dilution.

Many startups naturally gravitate towards venture capital (VC) funding, which offers rapid access to capital, enabling businesses to scale through hiring or infrastructure development. Yet, an exclusive focus on VC can overlook the strategic benefits of combining it with R&D tax incentives and government-backed innovation schemes.

Understanding Venture Capital in the Innovation Lifecycle

Venture capital plays a critical role in supporting startups from early-stage seed or angel investment through to later funding rounds such as Series A, B, and C. These funding stages provide growth runway but come with expectations. VCs demand consistent updates, evidence of progress, and clear reporting on how capital is being deployed.

For startups, this creates a time-sensitive environment where showing measurable returns on R&D investment becomes a key part of unlocking future capital. Venture capitalists are, after all, answerable to their own backers and need a compelling case for continued funding.

However, it is important not to view VC as the only route to financial sustainability. At FI Group, we support clients through a blend of R&D Tax Credits, grant funding, and innovation loans, each offering distinct advantages depending on a company’s size, stage, and sector. These funding streams can work in parallel, enhancing credibility with VCs while also preserving equity.

Leveraging R&D Tax Incentives to Complement VC Funding

One of the greatest advantages of claiming R&D Tax Credits is the ability to raise non-dilutive funding. Unlike venture capital, R&D tax relief allows you to reinvest in your innovation without giving up shares or negotiating valuations.

While HMRC has introduced more scrutiny into R&D tax claims, resulting in post-claim compliance checks, this should not discourage innovative businesses. It simply underscores the value of working with a specialist like FI Group. Our consultants ensure claims are robust, compliant, and defensible, maximising your return while minimising risk.

For startups already engaging with venture capital, a successful R&D tax claim can act as a bridge between funding rounds. In periods of slow investor response or seasonal funding gaps, such as the expected VC application backlog this autumn, a timely claim can extend your runway and improve your negotiating position.

Current Trends in the UK’s VC and R&D Investment Landscape

UK Venture Capital Investment (2024)

• Total VC Investment: £16.5 billion, a decline from the 2021 peak of £28.6 billion, returning to levels similar to 2019 and 2020.
• Deal Volume: 5,256 companies secured external funding in 2024, down from 6,885 in 2023 and 7,890 in 2021.
• Sector Highlights: Artificial Intelligence (AI), digital health, and life sciences experienced growth, with notable investments such as £822 million in Wayve, backed by SoftBank, Nvidia, and Microsoft. 

UK R&D Tax Relief (Tax Year 2022–2023)

• Total R&D Expenditure: £46.7 billion, a 4% increase from the previous year.
• Total Support Claimed: £7.5 billion through both the SME and RDEC schemes, a 1% increase from the prior year.
• Number of Claims: 65,690 claims were made, a 21% decrease from the previous year, partly due to the introduction of the Additional Information Form (AIF) requirement.
• Top Claiming Sectors: Information & Communication (25%), Manufacturing (24%), and Professional, Scientific & Technical (17%) sectors accounted for the majority of claims.

Beyond Cash: The Strategic Value of R&D Funding

R&D Tax Credits do more than inject cash. They signal operational maturity. Companies that reinvest tax relief into hiring, product development, or IP generation not only accelerate growth but also increase their valuation in future VC rounds. This also enhances their eligibility for grant programmes, which can further support international expansion or commercialisation.

At FI Group, our grant consultancy includes innovation roadmapping, aligning your funding strategy with open grant calls and long-term IP development. This level of foresight builds investor confidence and can be integrated directly into pitch decks, showing a clear path to revenue and exit.

Comparing VC Priorities with R&D Tax Trends

It is worth noting that venture capital investment and R&D tax claims do not always align by sector. In 2021, the most VC-backed UK sectors were Fintech, Health, and Energy. Meanwhile, HMRC’s highest R&D payouts went to Scientific & Technical Services, Manufacturing, and Information & Communications.

This disconnect is not necessarily negative. It reflects differing priorities. VCs chase high-return industries with scalable potential, while HMRC focuses on sectors driving national innovation. Both approaches are valid, but understanding their differences can help founders target the right funding source for their business model.

Whether you are seeking equity investment or leveraging government schemes, your industry focus will influence which doors open most readily.

Conclusion: Building a Blended Funding Strategy

The UK remains a top-tier destination for innovation thanks to a thriving venture capital ecosystem and a supportive R&D investment framework. While VC can accelerate growth, pairing it with strategic R&D funding offers a more sustainable and less dilutive path forward.

For startups and scaleups, aligning these two funding streams can not only improve cash flow but also enhance valuation, IP development, and investor trust. As VC and R&D landscapes continue to evolve, the smartest companies will be those that master both.