As the economy shifts more and more toward rewarding innovation, the types of financing that companies can access have followed this trend as well.

Both through the government and the private sector, a wide variety of support mechanisms and funding schemes have popped up. This means that entrepreneurs aren’t limited to having to sell equity or bootstrapping growth any longer. A new form of financing that is specifically geared at supporting innovative companies is the R&D loan, alternatively called R&D tax credit finance.

The purpose of this form of finance is to help smooth out the timeline of how R&D tax credits get paid . So, in this post we want to give you information on the factors that go into a lender’s decision to offer R&D financing.

But first, it makes sense to look at the normal timeline for R&D payouts and why it makes sense to finance a future R&D claim.

rd tax credits

How are R&D tax credits paid?

R&D tax credits are paid after the claim has been created and filed together with the CT600 form after the company’s financial year-end.

The main issue with the payout is that even though the funding is reliable, it is very slow to materialise. This is understandable, HMRC has cultivated a careful and considered approach to handing out taxpayer money. For a company on a steep growth path, though, this slow and steady pace can seem glacial at times.

A lot of founders end up spending months waiting for the payment to come through and it isn’t always a predictable schedule. Though the typical timeline between filing and receiving funding is 8 to 10 weeks, in 2019, a year of turmoil and change at HMRC, waiting 8 to 10 months for processing was not unheard of. This uncertainty can be bridged with products like R&D finance.


What is R&D tax credit finance?

R&D finance is a form of funding that allows a company to make use of its R&D tax credit early, in the form of a loan.

The way R&D finance works: The lender uses the estimated future tax credit as collateral for an affordable loan, typically starting at 6 months before the tax credit is expected.

Why it works: The R&D tax credit is a reliable scheme that HMRC has been running for over two decades, representing one of the most predictable receivables that a company can have. This is all, of course, conditional on the quality of the claim that the lender is evaluating, and working with a great advisor can yield dividends here.

The main condition for accessing R&D lending is, of course, qualifying for the R&D tax credit.

“The R&D tax credit is a reliable scheme that HMRC has been running for over two decades, representing one of the most predictable receivables that a company can have.”

What qualifies for R&D tax credits?

The three main qualification criteria for the company are:

  • Eligible to pay corporation tax in the UK.
  • Has carried out qualifying r&d activities.
  • Has spent money on said activities.

As the first condition is easy to figure out, that leads
us to the next two: technology and spending.


What technology qualifies for the tax credit claim? 

HMRC has set broad criteria for the types of activities it considers qualifying. This means that independent of the sector, companies could be investing in qualifying activities.

The main question an HMRC inspector seeks to answer (and wants you to have answered in your claim) is “Is the company attempting to resolve scientific or technological uncertainty through its R&D activities?”.

This could mean anything from the creation of a new piece of software that resolves a problem that was not “readily deducible by a competent professional” to creating a new manufacturing sub-process that saves time and resources.

The key is to create something that is a technological innovation rather than simply a market innovation. This can be tricky to understand, as the type of technology, however complex or filled with buzzwords, isn’t always important.

Take something cutting-edge like neural networks – if a company takes an existing neural net technology and brings it into a new market, say, neural networks for pet food distribution, this would not in itself be bridging technical uncertainty. But if the company works to integrate this neural net into other, unrelated technologies and creates more software in the process, that software would most probably be qualifying, just as if the company built its own neural net-based algorithm.

technology R&D tax

What types of spending qualify for R&D credits?

Though interpreting the technology can be quite a nuanced exercise, seeing what spending qualifies is more clear cut.

Costs that can be claimed include:

  • Your staff’s salaries, reimbursed expenses, NIC and pension contributions.
  • Subcontracted work.
  • Consumables that are used up or transformed in the course of performing the R&D (can include heat, light, and power).
  • Software that is used exclusively in the R&D process.
  • Costs related to clinical trials.
eligible spending for R&D Tax Credit

Does the R&D tax credit scheme matter when applying for finance?

For most lenders, it will matter a lot if a company falls into the SME scheme or into the large company scheme (RDEC).  Given that the duration of the loan is important and often capped at 6 months, most lenders will only offer facilities to companies claiming within the SME scheme. This is because the payout schedule is foreseeable and the processing time is well within 6 months. RDEC processing times can often exceed 6 months and are less predictable, so they are most often unsuitable for financing.


Are there any other things to consider when applying for R&D credit loans?

If you can claim R&D tax credits, you’ve fulfilled the baseline criteria for R&D finance. If that’s a given, there are a few more details to consider when applying for a loan.

Profit or Loss-making 

A company that is looking to get an advance on their R&D will need to be receiving a cash benefit from HMRC, which will act as the collateral and repayment mechanism for the loan. If the company is not receiving this benefit and is only getting an offset on their tax burden, there is no asset to be financed. As most of the companies who receive a cash tax credit are loss-making, this is an important factor for lenders as well.

HMRC debt

One of the main factors a lender will look at is HMRC debt. If the company has significant debt outstanding from PAYE or VAT, this will preferentially be extinguished through the R&D tax credit. What this means is that if you owe money to HMRC, they will keep your R&D tax credit payments. This is the case even if a payment plan is in place.

Other debt and charges

If the company has multiple charges and is burdened with a lot of pre-existing debt, it becomes harder to arrange suitable security for the new debt facility.  For most companies that are claiming R&D and incurring a loss, this won’t be a problem as debt finance is typically unavailable at this stage.

Overall company health

R&D lending is ideal for companies that are on a growth path and want to use this type of funding to put fuel on an already existing fire. If the company does not have a coherent plan for the future and solid documentation that backs this up, it will be hard to make the case to a lender that the company should be funded.

Conclusion

To sum up, the main condition to be able to apply for R&D finance is, as you would have expected, eligibility for the R&D tax credit. Outside of that, you should be aware of what scheme you fit into (SME or RDEC) and if you are going to be incurring a profit or a loss at the end of the financial year. A potential lender will also look at other debt you have on the balance sheet, especially if it is owed to HMRC, and at other charges. The last but not least important factor is the trajectory of your company. If the company will use the funds to accelerate its upward trajectory and not to plug existing holes in its plan, getting funding is all but a certainty. Let us know in the comment if you have any questions about how R&D finance works, or if you have any experience that you’d like to share.

Alexandra Kaschuta

Alex is a tech-focused funding expert, helping innovative companies grow through innovative funding through her work at Fundsquire. She also has a background in journalism, having written for outlets like Vice and many others in the past on topics ranging from philosophy to economics.