Financial Challenges for the UK Science & Technology Sector in 2025/26
Many technology businesses face a long list of challenges throughout their lifecycle. Financial challenges can especially pose issues for UK companies in the science & technology sector.
Financial challenges for UK science and technology companies can include raising funds, claiming relevant tax reliefs, R&D funding challenges from changes to the R&D tax regime, financial modelling, scaling the business and accounting for fast growth.
In this article, I’ll explore some of the recent UK tech funding news and highlight the main financial challenges that science and technology companies face in 2025-26.
Introduction to the UK science and technology sector
The UK science and technology sector is estimated to contribute over £90 bn to the economy*. The sector will face financial challenges in 2025-26, with a focus on economic growth and innovation.
The UK houses a world-class research base, universities, and many spin-out and start-up companies. Despite significant R&D investment, the UK government often fails to capitalise on the science and technology business base, where a growing number of companies start up here but move overseas.
The financial landscape for the UK science and technology sector is complex, with various funding sources and government support. The sector is often affected by government policy and the government’s decision to allocate funding for areas such as Research and Development for science innovation and technology in the UK.
UK Research and Innovation (UKRI) is the national funding agency for research and innovation in the UK, supporting the country’s leading scientific and technological projects.
The agency announced a £300 million reduction in its budget for 2025/26 compared to the previous year spending. This will undoubtedly impact the research and innovation sector and potentially threaten the UK’s world-class research.
Accessing funding and government support
Many science innovation and technology companies face challenges in raising funding to scale their businesses. Obtaining finance is not always easy, especially if the business is a small business or a start-up. Borrowing may be difficult due to a lack of security. Balancing short-term funding needs with long-term strategic goals can also be challenging.
These funding challenges can often be a distraction for founders and directors. However, with the right help and exploring a wide range of funding options, we see companies in the sector accessing funding to unlock growth.
In recent years, we’ve seen a significant drop in funding available for science and technology companies from Venture Capitalists (VC) and Angel Investors. We saw VC funding for startups falling overall by 50% in the third quarter of 2024. Whilst VC funding still remains lower than in the past, Q4 2024 did see this begin to pick back up, which is encouraging for science and technology companies if this upward trend continues.
Grants
Grants from bodies such as Innovate UK are available and can be invaluable to early-stage tech companies. Grants can provide valuable resources for businesses to carry out projects or grow.
Private equity
Another source of funding that science and technology companies can overlook is Private Equity funding. This is often because owners fear the lack of control when engaging with Private Equity funders. But this type of investment can bring invaluable expertise to a business around scaling and unlocking growth.
R&D tax credits
R&D tax credits can also be a valuable source of growth funding for science and technology companies. This funding can be in the form of a cash reimbursement or a tax deduction.
The government has announced an overall increase in R&D spending within DSIT. This will include funding for the Biological Sciences Research Council and the Natural Environment Research Council. The funding also supports Innovate UK, the Humanities Research Council, and Research England. The government also announced a substantial settlement for R&D, with a focus on emerging technologies and innovation.
Venture capital schemes
The Enterprise Investment Scheme (EIS) is designed to stimulate investment in early-stage businesses through venture capital. There are other similar schemes such as the Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR) and Venture Capital Trusts (VCTs). The EIS provides investment for newer businesses in the UK. The SEIS helps start-up companies raise the capital they need to grow from private investors buying shares in the business. Venture Capital Trusts are designed to support young businesses with high growth potential.
R&D tax relief and evolving tax policies
UK science and technology SMEs and their founders will face additional tax challenges in 2025/26. These include changes to R&D tax relief, increased National Insurance contributions, and changes to Capital Gains Tax (CGT).
Changes to the R&D tax regime include a new R&D merged scheme, adjustments around treatment of subcontracted work, and the need for advanced notification for some companies. These changes will add further complexities for science and technology companies in 2025 and beyond.
National insurance increases will place additional pressure on companies, potentially causing challenges such as increased payroll costs, reduced profitability, and cash flow.
Changes to CGT could significantly impact the science and technology sector. Some founders could potentially feel the pressure to sell before they are really ready, which could impact the final sale value as founders try to rush through business sales before the next CGT increase in 2026. Increased CGT could also lead to tech entrepreneurs leaving the UK to set up in countries with more favourable tax regimes, affecting the UK sector overall.
Many science and technology companies operate across multiple jurisdictions, making tax compliance and transfer pricing complex. Navigating international tax laws and transfer pricing arrangements can also be a considerable accounting challenge in the sector.
Financial modelling for high-growth tech companies
Rapid growth, complex revenue models, and the need for flexible, adaptable models mean that science and technology companies face unique financial modelling challenges.
Accurately forecasting revenue can be particularly challenging for startups and early-stage businesses due to a lack of historical data and difficulty making reliable baseline assumptions for financial forecasting. Rapid growth and scaling also create challenges when forecasting future financial needs and financial modelling for science and technology companies.
Robust financial models are required to handle this potential rapid growth, uncertainty and changes in the technological landscape.
Accounting and financial challenges in the science and tech sector
Science and tech company accounting can be complex as it needs to address areas such as:
- revenue recognition
- intangible asset valuation
- capitalisation vs expensing of development costs
- making the most of R&D tax credits
- compliance with changing accounting standards
- managing cash flow
- balance sheet values
- cash management
Revenue recognition in complex business models
Complex sales arrangements, such as subscription-based models and bundled services, can complicate revenue recognition.
Valuing intangible assets accurately
UK accounting standards disallow the recognition of internally generated intangible assets. For example, if a business spends money on internally generated brands, logos, or similar assets, they must be recognised as an expense in the profit and loss account rather than capitalised and recognised as an asset on the balance sheet. One exception to this is development costs (see below).
Capitalising vs expensing development costs
Accounting for research and development (R&D) involves decisions on whether to capitalise or expense the costs involved in the research. The decision can significantly impact a company’s financial statements and tax liabilities.
For example, software development costs can include research, coding, design, testing, and debugging. For science-led pharmaceutical industries, these costs can include preclinical research, clinical trials, and post-marketing studies.
Development costs can be treated as either an expense or a capitalised asset, depending on the nature of the project and whether it meets the capitalisation criteria under accounting standards. If these costs meet the capitalisation criteria, they are recognised as an intangible asset on the balance sheet and amortised over their useful life. If not, they are expensed on the income statement.
The decision whether to capitalise or expense these costs can significantly impact the company’s financial statements.
Making the most of R&D tax credits
Companies in this sector invest heavily in research and development. R&D funding challenges can significantly affect cash flow.
While R&D tax credits are a great source of finance for businesses, claiming them can pose challenges due to ever-changing rules. The drive to tackle fraudulent R&D claims and non-compliance means increased scrutiny of R&D claims, likely leading to more claims challenges from HMRC.
Keeping up with changing accounting standards
Such dynamic sectors as science and technology can result in frequent changes to accounting practices and standards, which pose challenges in disclosure and financial reporting.
These ever-changing standards and reporting requirements can be overwhelming for science and tech start-ups that may not have specialist accounting expertise or robust financial systems.
Managing cash flow in science and technology businesses
In the early stages, science and tech businesses can face unique cash flow challenges brought about by high development costs, rapid growth, and potential delays in revenue generation. Strong cash management processes must be implemented early to retain working capital, sustain growth and obtain future finance.
Interpreting balance sheet values in high-investment sectors
Science and technology businesses often suffer from poor balance sheet values because investment outweighs income generated in the early stages. This can lead to the market believing the company is poorly performing or financially unstable, which may not be the case. This can affect future funding being sought.
Financial considerations when scaling a tech business
Scaling a business, especially in a fast-growing sector, can present many financial challenges simultaneously. Managing cash flow, securing funding, controlling costs, and ensuring compliance are critical to the business.
The business may require substantial capital to scale effectively. Access to funding and running various funding rounds are essential to growth but can distract from the day-to-day operations. Companies need a robust financial strategy and the right information and reporting to secure the funding required for expansion.
Scaling up processes and systems, such as accounting procedures and software, is also fundamental to ensuring ongoing compliance and adequate reporting for the business’s strategic needs.
Helping science and tech businesses thrive with specialist financial guidance
Whilst there may seem to be a long list of financial challenges facing businesses starting up and growing in the science and technology sector, especially for early-stage businesses, your business can thrive, achieve rapid growth, and build real value with the right support and advice.
The financial performance of companies in the sector can often look worse than they are. Selecting specialist accountants to advise you on the right accounting policies, processes, and systems and have the right contacts to help you fuel growth.
Here at Edwards, our team of chartered accountants in Walsall can guide you through the process of starting and scaling your business. Our clients range from small technology start-ups and spin-outs to subsidiaries of large international groups.
Not only do we work closely with your business to give you the bespoke support you need and establish lasting relationships, but we also work as efficiently as possible to keep fees to a minimum.
Edwards Chartered Accountants are routinely recommended by venture capitalists and business angel networks that have worked with us for many years.
Our specialist science and tech accountants can help your business:
- Access tax relief to free up resources for development
- Get objective, expert advice on your business plans
- Get support for fundraising and investment
- Ensure compliance with current financial legislation
Contact us to speak to one of our specialist accountants today.
*Source: The Office for National Statistics (ONS).
