Subcontracting work for research and development purposes brings many advantages. It allows compa...
R&D advance funding (also known as R&D Tax Credit loans) helps businesses to continue innovating without having to go into debt or give up any equity. It does this by giving businesses the opportunity to increase their capital by up to 20%. This blog explains the ins and outs of R&D advance funding, including how it can help your business boost capital and increase R&D activity.
R&D advance funding is a type of loan that allows businesses to borrow against their R&D Tax Credit entitlement. With this, companies can access funds for research and development projects more quickly, giving them extra flexibility to invest further in growth.
The advance cash funding for the R&D Tax Credit does not have to be paid back until HMRC has processed your claim.
Many businesses, especially SMEs, see this as an attractive option as there are no upfront cash payments. The fee for R&D advance funding comes from a small interest payment which is taken directly from HMRC once your claim is processed, removing any debt against the loan.
Yes, R&D advance funding, R&D Tax Credit loans and R&D advance loans are all the same type of loan that uses your future R&D Tax Credit payment from HMRC as collateral.
In the most recent Small Business Survey, 15% of UK SMEs said that “obtaining finance” was a major obstacle to the success of their business. Indeed, 74% of SMEs said they were currently using some form of external finance, and 18% said they would likely apply for external finance within three years.
There are several forms of external finance available to businesses, including bank loans, but with increasing inflation and higher interest rates this form of debt isn’t always an attractive choice.
This is also the option of equity financing, but not all business owners are keen to give away a stake in their business. Equity finance deals can also be tricky in the current environment where market instability has made it more challenging for UK businesses to raise capital. The uncertainty in the market is also leading to fundraising rounds taking longer than in recent times, which could delay investment in R&D.
If a business carries out research and development, it can likely claim back costs through R&D Tax Credits. These credits are retrospective and linked to tax return dates. This means it can take up to 15 months between the expense being incurred and when a business receives its credit payment from HMRC. While the credits will give companies a valuable cash injection, it’s not ideal from a cashflow perspective.
R&D advance funding or R&D Tax Credit loans are particularly beneficial because they allow businesses to boost cashflow in a much shorter timeframe.
Being able to draw down cash before the end of a tax accounting period can have enormous advantages for the R&D work itself, as projects can be supported with investment at an earlier stage than would usually have been the case. This is because R&D advance funding can be used ad hoc or quarterly, depending on what best suits the business. This means that R&D advance funding isn’t simply a solution for accessing cash quickly. It also provides a strategic advantage for businesses, as the unlocked funds allow for accelerated investment in R&D. With any extra R&D spend, businesses will ultimately be able to claim more back in R&D Tax Credits.
R&D advance funding can also reduce the need for equity financing, so while a business may spend the same on R&D, it doesn’t need to dilute its equity by issuing new shares to raise capital.
For example, R&D advance funding could see your businesses having 20% available capital for R&D expenditure. This can either result in 10% more in R&D Tax Credits that your business can claim or 18% less capital needed for the same level of R&D activity.
R&D advance funding is claimed against the tax relief that you claim on your R&D activity. As such, it can help cover expenses such as materials, staff costs, and subcontractors related to R&D projects.
You can learn more about what you can claim through R&D Tax Relief by reading our explainer blogs on the SME R&D Scheme and the R&D Expenditure Credit Scheme.
With R&D advance funding, companies don’t need to rely solely on their own capital or seek out expensive external financing before R&D programs can progress. This could lead to more R&D breakthroughs, driving faster product, service and process introductions or upgrades!
Would you like to know more about advance funding for R&D? Speak to one of our highly qualified tax experts.
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How R&D Tax Credits Are Changing From April 2023
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