When could a low cost loan be costly for your R&D project?

Innovate UK is running a pilot programme of loan competitions over 2 years to the end of 2019. This is for late-stage research and development (R&D) projects that have not yet reached the point of commercialisation.

A total of up to £50 million is available for business innovation projects. The aim of the project is to broaden the range of innovation finance support available to businesses. This is so that they can access funding at all stages of innovation.

However, as is the case with Innovate UK’s grant-funded projects, the expenditure incurred on a project which is supported by these loans will not be qualifying expenditure for the purposes of the SME R&D relief. The company will only be eligible for R&D relief under the large company scheme (RDEC).

You should give careful consideration as to whether such a loan is beneficial.

Background to the loans

Innovation loans are designed for innovations near to market, whereas grants are geared towards earlier stage, riskier innovations. Their offering is through loan competitions to UK small or medium-sized enterprises (SME). These SMEs should want to scale up and grow by developing new or improved products, processes or services.

Companies will need to successfully apply into one of the Innovate UK loan competitions to obtain an innovation loan. It is a competitive process which may allow them to borrow between £100,000 and £1 million to cover up to 100% of their eligible project costs.

Interest sets for the duration of the innovation loan at the opening of each loan competition. It will use the discount rate for financial transactions set by HM Treasury in its Public Expenditure Statistical Analyses. Currently, this is 3.7% per year. There will be security where it is available.

Only single (i.e. non collaborative), UK based SMEs who are planning a project that fits with the defined scope of the specific loan competition may apply.

Impact on R&D

The receipt of an Innovate UK loan, no matter how small, will result in the company being ineligible for the SME scheme for R&D tax relief. Whilst you can claim relief under the RDEC scheme, this is substantially less beneficial.

Set out below is an illustration of the difference (assuming a loss making company):

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This illustrates that the receipt of a loan from Innovate UK severely restricts the cash benefit available from R&D relief (even if the loan is a very small fraction of the overall spend).

Commercial Considerations

To qualify for a loan, SMEs need to show that they can afford the interest and repayments on the loan. They will also need to prove that they cannot obtain finance from other sources such as banks and equity investors.

On this basis, it may be that applying for an Innovate loan is the only available source of funding for a company and there are no other avenues to exhaust.

However, if the loan amount is small or can be funded by other means, these should be considered in priority to protect the R&D relief available.

Contact us

For further information, please contact a member of our Tax team on 0191 285 0321 or email advice@taitwalker.co.uk.