If you are a private equity house, a venture capitalist or a high-growth business trying to attract the attention of investors, then you cannot ignore R&D tax credits. When used strategically, they can supercharge a portfolio. The benefits are numerous and mutually beneficial. With the help of an R&D specialist who is also tax-qualified, you can enjoy the maximum strategic value of the R&D tax credit incentives.
The benefits of R&D tax credits
There is a whole range of amazing benefits associated with claiming R&D tax credits and these apply to both the company and their investors.
1. Cash benefit
In the most basic terms, R&D tax credits provide a cash benefit. This cash can be used to hire new staff or buy machinery and other crucial assets to support a company’s continued growth. A cash injection into a business, without sacrificing equity, is really valuable and can help drive future profitability, the profits may form the basis of the company’s valuation in the future. The money can also help extend the runway between funding rounds (more on this later). Alternatively, it can be kept aside to smooth out any bumps in the road.
Many investors with a focus on the technology sector, whether private equity firms or VCs focusing on Series A or Series B (and beyond), are aware of R&D tax credits and the numerous benefits they deliver. There are some investors, however, that are not aware of the full extent of qualifying expenditure or how R&D tax credits can be used strategically to grow a business. This is where ForrestBrown can help.
Ultimately, the true value of an R&D claim is realised when the cash generated is used strategically in the business. ForrestBrown loves working with growing businesses in an investor’s portfolio to ensure they’re making the most of R&D tax credits. There are often fantastic opportunities to unlock more funding for innovation. In particular, we focus on their cash position and how to generate them more money.
By getting to know the businesses in your portfolio, we can begin to really understand their goals and advise strategically. For a potential high-growth business, R&D tax credits are a great way to improve their commercial position and accelerate growth.
Investors want to invest in businesses that are growing quickly. With quick growth, you are more likely to be able to maximise your returns more quickly – and exit. It is often the case that companies in the early stages of growth are investing more heavily in R&D and, in these cases, we will be able to identify more qualifying expenditure. R&D tax credits are also particularly good for loss-making businesses – again, it is often companies that are yet to turn a profit that are at the right stage in their development for investment.
2. Buying time
We know that securing funding is not always plain-sailing. It has its ups and downs, and often takes longer to secure than businesses want. Where fundraising potentially takes many months, R&D tax credits provide cash in the bank more quickly – we usually advise 4-6 weeks with us, and then 4-6 weeks with HMRC. With money on the balance sheet, investors will see this as capital in the business. It puts you in a position of strength and makes sure that you don’t run out of cash.
More superficially, a business claiming R&D tax credits is attractive to certain investors as it shows that you are innovative, commercially-minded and financially astute.
3. Extending the funding runway
An R&D tax credit claim can have a bearing on when you decide to secure funding. It allows you to delay when you initially start fund-raising and also gives you a strong position during various rounds of funding.
Many tech companies often have a timeframe between each funding round of at least a year, if not closer to two years. R&D tax credits can help extend this funding runway by providing more cash in the bank. This in turn allows a business to delay the next financing event. The months of runway that this buys can be used to get more subscribers or more users of your product, bringing yet more value to the company.
It’s much better to try and raise funds at a higher valuation so that you give away less equity.
ForrestBrown’s service for investors
Our working relationship with private equity houses is all about empowering you with knowledge and then providing an end-to-end R&D tax credit service for your companies is therefore at the core of our service.
We will work together with you, providing you with a highly experienced partner to deliver strategic R&D tax credit advice for you and your portfolio. We make it our mission to supercharge your portfolio. As well as next-level ongoing strategic advice, we will equip you with a tactical understanding of R&D tax credits in relation to a number of scenarios that we explore below:
Having spent time getting to know you, a tax qualified adviser will review all of the current investee companies within your portfolio in relation to R&D tax credits. We will also speak to them and ensure that they are generating the maximum benefit from R&D tax credits. In particular, we will focus on generating them more cash. This can be used to buy new equipment, hire staff or re-invest in their R&D to disrupt their market.
Our review will usually result in one of two things, depending on whether they are already claiming R&D tax credits or not.
- R&D tax credit eligibility assessment – Our eligibility assessment involves a detailed discussion about the business activities so that we can confirm eligibility. Our expert team will uncover the extent of the qualifying R&D activities and costs and answer any questions they might have.
- R&D tax credit healthcheck – Our R&D tax credit healthcheck is a thorough claim review. We will assess whether there is potential for a claim uplift (i.e. more value!) as well as identify any potential risks. Based on our assessment, we will then discuss next steps with the company.
Ongoing strategic advice
Our expert team will be available to advise you on R&D tax credits on an ongoing basis. This can be in relation to your current portfolio or any new investments.
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When assessing potential investment opportunities, we will help you understand the company’s position in relation to R&D tax credits. We can help you assess the impact that any future (or historic) claims will have on what you offer them and when. For example, if you know that the company hasn’t claimed but will benefit from a substantial claim, this can provide an edge in the investment decision process.
If a business is not suitable for your private equity house, but you identify them as eligible for R&D tax credits then you can share this knowledge. This goodwill gesture contributes to a positive community where innovation is rewarded.
The benefits of our service extend to all the companies that you come into contact with. Our knowledge can help businesses in several scenarios:
A company you are invested in is not claiming R&D tax credits:
- They qualify for R&D tax credits but aren’t claiming– ForrestBrown is in the best position to help the company. We both add value to any claim and help them grow through our strategic support.
- They don’t qualify for R&D tax credits but have the potential to qualify in the future – ForrestBrown can help the company identify why it doesn’t qualify, and if there’s any potential to claim in the future. This strategic planning is highly useful.
- They don’t qualify for R&D tax credits and never will qualify – ForrestBrown will tell a company categorically if it doesn’t qualify, and unless it has a radical change, will never qualify. This provides peace of mind to the company. It can finally silence the nagging doubts and ignore the cold calls.
A company you are invested in is already claiming R&D tax credits and you want to:
- Make sure their claim is fully maximised.
- Make sure they are protected, and that their claim can withstand the scrutiny of HMRC.
Beyond these specific scenarios, ForrestBrown will provide high-level insights around structuring your entire portfolio. This can include how best to claim R&D tax credits under both the SME and RDEC incentives.
We are highly experienced at strategically advising investors around R&D tax credits and their wider tax position. Our overall knowledge of tax efficient strategies means that we can provide powerful insights. We will consider the impact of a company’s number of employees and financial year-end when it comes to maximising the impact of your R&D claims.
This is mutually beneficial for the company and you as a private equity firm, giving you the edge.
Why switch to ForrestBrown?
Many businesses already claiming R&D tax credits are concerned about switching their R&D advisers. But it is definitely a consideration to be had, both for the companies themselves and those investing in them.
At ForrestBrown, R&D tax credits is all we do. We have a level of expertise that is unrivalled within the industry. When you combine this with our pragmatism and personality, the level of value we provide can really give companies and their investors the edge. We are tried and tested, so you can be confident that we will deliver.
As a company and as an investor, if you use non-specialists to manage your R&D claims then you risk not fully maximising value. Without having specialist knowledge, these companies may not consider the full scope of qualifying expenditure. This can equate to missing out on tens or even hundreds of thousands of pounds.
Working with R&D specialists who are chartered tax adviser qualified results in increased cash benefits. Especially when they have industry specialists too. When used strategically, this is hugely valuable to the beneficiary companies and those that invest in them. After processing the initial claim(s), we continue to work closely with a business, embedding practices that ensure the impact of future R&D claims is maximised. We learn more about how the business operates, analyse available data and embed record-keeping processes that work within existing systems to continue to grow claims year after year.
At ForrestBrown, we are also highly experienced in working with businesses in receipt of grant funding. Many innovative high-growth companies will already be using grants to fund their work. We are able to advice on how to utilise both the RDEC and SME R&D incentives alongside grants to put them in the best position.
One of the other risks you may face from using a non-specialist is HMRC raising an enquiry. ForrestBrown pride ourselves on our robust processes. If a company already faces an enquiry from HMRC or wants to minimise the risk of receiving one, then we can help.
At ForrestBrown, we work in a way that frees up your time as a company so that you can focus on what matters. We have found that some businesses are experiencing a considerable time drain as a result of how their provider currently processes R&D tax credits. We will maximise the strategic impact of your R&D tax credit, all the while ensuring that we take as little time as possible from vital people within your business. Intelligent record-keeping plays a significant role in this.
Contact ForrestBrown today
You will now appreciate just how beneficial R&D tax credits are to both investors and to the companies you are investing in. Using ForrestBrown to advise on R&D tax credits can supercharge your investment portfolio. To find out more about partnering with ForrestBrown and how we can work together to benefit you and your clients get in touch.