Startup competition prize money and university enterprise grants look like free money, but each one has a specific tax treatment and accounting entry. The split that matters: did the individual win it, or did the company? The answer changes who pays what to HMRC. This page sets out both cases, plus how grants are recognised in company accounts and how they interact with R&D relief.
Startup competitions pay prize money to a person or to a company. The paperwork decides which. Check the competition’s T&Cs and the payment instructions before accepting.
| Won by individual | Won by company | |
|---|---|---|
| Who gets taxed | The individual | The company |
| Tax type | Income tax (if trading) or possibly tax-free (if non-trading, non-employment) | Corporation Tax (19% / 25%) |
| Reported on | Self assessment, if any | CT600 |
| Can be put into the company | Yes, as a director’s loan or share subscription | Already there |
HMRC’s long-standing treatment of competition prizes depends on the connection between the prize and a trade or employment:
The grey zone is where a student has an early-stage startup not yet trading. HMRC’s test is whether the activity has the “badges of trade” (frequency, profit motive, systematic activity, etc.). If the startup is trading, the prize is trading income regardless of who it was paid to.
If the individual won it and wants to use it as working capital, the two routes:
Director’s loan is almost always simpler. Record it in the ledger with a written loan agreement.
Treated as trading income. The company recognises it in the P&L in the period it is awarded (or earned, if the award is contingent on future performance). Corporation Tax applies at 19% (up to £50,000 of profit), marginal relief in the band, or 25% (above £250,000) for 2026/27.
Entry:
UK universities and research councils offer three main shapes of funding to spin-outs and student ventures. Each has a different accounting entry and tax treatment.
Non-repayable, usually tied to specific milestones or deliverables. Under FRS 102 Section 24, grants are accounted for using either the accrual model (recognise over the period in which related expenses are incurred) or the performance model (recognise when conditions are met).
Most startup grants use the accrual model: deferred grant income on the balance sheet, released to the P&L as the related costs are incurred.
Tax treatment: grants used for revenue expenditure are usually taxable trading income (offset by the deductible expenditure, so net neutral). Grants used for capital expenditure may reduce the capital cost or be taxable — depends on the grant’s conditions.
Repayable with interest unless converted to equity on a trigger event (usually a priced round). Recognised as a liability at amortised cost under FRS 102 Section 11. Interest accrues through the P&L.
Tax treatment: interest is deductible as a financing cost (subject to the Corporate Interest Restriction, which rarely bites for small spin-outs).
Shares issued to the enterprise fund on standard terms. No P&L impact at issue. The fund usually invests on the same terms as other seed investors (ordinary shares, SEIS/EIS-compatible if possible).
Innovate UK grants are the largest source of non-dilutive funding for UK spin-outs. They are usually structured as 70% grant funding of a project’s eligible costs for an SME (lower for larger companies), paid in arrears against claimed costs.
Key accounting points:
Our Innovate UK grant accounting service page covers the setup and compliance detail.
Under the merged R&D scheme (periods beginning on or after 1 April 2024), the interaction with notified state aid grants changed. The old rule — that any state aid notified grant disqualified a project from the SME scheme entirely — no longer applies in the same way.
Under the merged scheme, the usual position:
This is a material change from the pre-2024 position. Spin-outs that previously avoided notified-state-aid grants to protect SME R&D claims should reconsider under the merged scheme. Project-level modelling is still worthwhile.
Innovate UK and most research-council grants require:
Set this up on day one. Retrofitting a Xero chart of accounts six months into a project to carve out grant-eligible costs is painful and tends to lose claims.
If won by a company, yes — Corporation Tax on the amount. If won by an individual, it depends on whether the activity is a trade: trading income if yes, usually tax-free if no. The paperwork and the facts of the win decide which.
Yes. The simplest route is a director’s loan: the individual lends it to the company, repayable later. Avoids any share-issue consequences and keeps the tax position clean.
Under the merged R&D scheme (from April 2024), no — the project still qualifies for the 20% RDEC. The grant income nets off, but the credit is still available. This is a change from the pre-2024 SME scheme.
Under FRS 102 Section 24, using the accrual model: deferred grant income on the balance sheet, released to the P&L as the related costs are incurred. For milestone-based grants, use the performance model: recognise when conditions are met.
If the society is a sub-account within the students’ union and is not trading, the prize usually sits inside the SU account without a separate corporation tax entity. Once the venture incorporates and starts trading, future prizes won by the company are trading income.
Official guidance: Corporation Tax, R&D tax relief, Innovate UK. AccTek is independent of HMRC and GOV.UK.
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Related: university spin-outs and student startups (hub) | Innovate UK grant accounting | IP licence accounting | R&D tax credits founders’ guide | startup runway calculator
Godwin Pinto ACA (ICAI) is the founder of AccTek and a member of ICPA, with 20+ years of experience in accounting and tax for contractors, startups and SMEs. Previously at PwC.
AccTek is a member firm of the Institute of Certified Practising Accountants (ICPA), and our founder is a member of the Association of International Accountants (AIA) holding an AIA Practising Certificate. Our accountants hold qualifications and accreditations from trusted professional bodies including the AIA, ICPA, AAT and ACCA.
