A small business grant is money from a public body or fund that, unlike a loan, does not have to be repaid as long as you meet its conditions. In the UK most grants are run locally or by sector, not as one national scheme, and many pay only part of a project's cost, such as 40% or 50%, with the business funding the rest. In October 2026 GOV.UK's business finance finder listed 45 schemes tagged as grants. Grants are taxable when they meet revenue costs; capital grants instead reduce the cost on which capital allowances are claimed.
How small business grants work
A grant is a contribution towards a defined project, paid against costs you have incurred or will incur. Four features are almost universal:
- Match funding. The grant covers a percentage of eligible costs and you pay the balance;
- Eligible costs only. Each scheme lists what it will pay for, such as equipment, consultancy or shop-front works, and excludes the rest;
- Conditions. Location, sector, business size and stage, and outcomes such as new jobs or new products;
- Claw-back. Breach the conditions, for example by selling the asset early, and the funder can ask for the money back.
Check each scheme's rules on timing before you commit any spending. If costs incurred before the grant is approved are not eligible, buying first and applying later can cost you the grant.
Where to find grants
The starting point is GOV.UK's Finance and support for your business finder. It filters schemes by type of support (finance, equity, grant, loan, expertise and advice, recognition awards), business stage, industry, number of employees and region. Examples from the grant listings show how varied they are:
| Scheme | What it offers | Who for |
|---|---|---|
| Pendle Town Centre Premises Improvement Grants | Up to 50% of eligible costs, maximum £3,000 | Shop fronts in Pendle town centres |
| BIC Innovation Grant Sunderland | 40% contribution to projects valued £5,000 to £25,000 | Trading businesses in Sunderland with an innovative project |
| Great Ideas, York and North Yorkshire | Innovation support and the chance to pitch for a grant of up to £60,000 | Businesses in York and North Yorkshire |
Other sources include your local council and combined authority, sector bodies, Innovate UK competitions for research and development, and the devolved finders for Scotland and Northern Ireland, which the GOV.UK finder links to.
How grants are taxed
A grant is not tax-free just because it is not repaid. HMRC's Business Income Manual says grants are "subject to the normal taxation rules", so the treatment depends on what the grant pays for:
- Revenue grants. Grants that meet revenue expenditure, such as wages or consultancy fees, "are normally trading receipts" and are taxed as part of profits;
- Capital grants. Grants that meet capital expenditure are "normally not trading receipts", but they reduce the qualifying expenditure for capital allowances;
- General grants. A grant not tied to a specific purpose is an "undifferentiated receipt" and is treated as revenue.
For VAT, a true grant, where money is freely given and nothing is supplied in return, is not consideration for a supply, so no VAT is charged on it. If the "grant" is really payment for services you deliver to the funder, it may be consideration for a supply, and VAT may be due if you are registered. HMRC warns that the label "grant" may be misleading; what matters is what actually happens.
Worked example: a capital grant
A Sunderland engineering company buys a £20,000 machine for a new automated process and wins a 40% innovation grant of £8,000.
- Cash. The company pays £20,000 and receives £8,000, a net cost of £12,000;
- Capital allowances. Because the grant meets capital expenditure, allowances are claimed on £12,000, not £20,000;
- Profit. The £8,000 is not a trading receipt, so it is not taxed as income; its tax effect comes through the lower allowances;
- Accounts. Under the FRS 102 accrual model, a grant relating to an asset is released to income over the asset's useful life; the performance model can recognise it sooner. Either way, the accounting does not decide the tax.
Had the same £8,000 paid for consultancy fees, it would have been a revenue receipt taxed in the year, with the fees deducted as normal.
Subsidy control declarations
A grant from a public authority can be a subsidy under the Subsidy Control Act 2022. Many small local grants are given as "minimal financial assistance", which is outside the main subsidy control requirements only if the total minimal or SPEI (services of public economic interest) financial assistance an enterprise has received does not exceed £315,000 over the elapsed part of the current financial year and the two previous financial years. Funders using this route therefore need to know what you have already received, and usually ask you to declare it. Keep a record of every grant, its date and its amount, as the figure must be accurate.
Making a strong application
- Fit the criteria exactly. Read the eligible costs list and outcomes before writing anything;
- Show the match funding. Evidence that you can pay your share, from cash, a loan or investment;
- Quantify outcomes. Jobs created, productivity gains or new products, with a realistic timetable;
- Get quotes. Most funders want supplier quotes for each cost;
- Plan for reporting. Grants usually require claims, evidence of spend and sometimes an audit of the grant.
The primary sources are the GOV.UK business finance finder, HMRC's guidance on grants and subsidies (BIM40451) and VAT on grants (VATSC06311), FRS 102 Section 24, and section 36 of the Subsidy Control Act 2022. If a loan suits the project better, see our guide to business loans.
Funders often require independent verification of how the grant was spent. Our grant audit team carries out those reports, and our business tax advisers can confirm how a grant will be taxed before you accept it.