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R&D Advance Funding: Accelerate Your Tax Credit
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R&D advance funding is a short-term loan to a UK limited company, based on an R&D tax credit it expects from HMRC. The company repays the loan when HMRC pays the credit. It can help a company that needs cash now rather than when HMRC pays. The company can no longer hand the HMRC payment itself over to a lender, so the loan is a debt of the company.
What R&D Advance Funding Is
An R&D advance is a short-term loan sized against the R&D tax credit a company expects to receive. The provider lends part of the expected credit. When HMRC pays the credit, the company uses it to repay the loan and the provider's charges.
This changed in 2023 and 2024. An assignment of an R&D tax credit payment made on or after 22 November 2023 is void. For claims made on or after 1 April 2024, HMRC generally pays the credit only to the claimant company, with narrow exceptions (HMRC manual CIRD81805). So a provider cannot simply take over the HMRC payment. Providers now rely on other protection, such as a charge over company assets or a personal guarantee from a director. Ask each provider exactly what security it wants before you go further.
Eligibility: Who Qualifies
Only companies within the charge to UK Corporation Tax can claim R&D relief (gov.uk R&D relief guidance). Sole traders and partnerships cannot claim it, so they cannot use an R&D advance either. That is a limit of the tax relief, not of FundBiz.
A provider will want to see a documented R&D claim that has been submitted to HMRC, or is ready to submit, prepared by a qualified adviser or accountant. For accounting periods beginning on or after 1 April 2024, claims are made under the merged scheme or, for qualifying loss-making SMEs, enhanced R&D intensive support.
Earlier periods use the older SME and RDEC schemes. Providers will also check filed accounts at Companies House, that there is no winding-up petition or administration, and whether the spending in the claim is properly evidenced. Minimum claim sizes vary by provider.
Advance Rates and Typical Costs
Providers usually lend only part of the expected credit. The part they hold back gives some room if HMRC reduces the claim. How much they lend depends on the claim and the provider.
Charges are often set as a monthly fee on the amount borrowed, plus an arrangement fee. Providers do not all publish their prices, so get a written quote that shows every fee and the total you will repay. Because the loan runs only until HMRC pays, the total cost depends on how long HMRC takes. A delay or an HMRC enquiry makes the loan cost more. The example further down shows how the sums work.
How the Process Works in Practice
You send the provider your R&D claim, accounts and recent bank statements. The provider reviews the claim and your finances, then makes an offer that sets out the amount, the fees and any security it wants.
Once you sign, the provider pays the loan to the company. HMRC processes the R&D claim as normal and pays the credit to the company's own bank account. The company then repays the provider in line with the agreement. HMRC payment times vary, and an enquiry into the claim can add months, so plan for the loan to run longer than you hope.
R&D Advance vs Waiting for HMRC Repayment
The trade-off is simple. You pay the provider's charges in return for having the cash before HMRC pays.
If the company has enough cash and no urgent need, waiting costs nothing and you keep the whole credit. If the company has supplier arrears, PAYE to pay or a project that needs money now, borrowing against the credit may make sense. It also avoids selling shares to raise money. Compare the total cost of the loan with the real cost of waiting, such as late payment charges, lost work or the cost of other borrowing.
Post-April 2024 Merged Scheme Considerations
For accounting periods beginning on or after 1 April 2024, the SME and RDEC schemes were replaced by the merged scheme. Loss-making SMEs that spend at least 30% of their total spending on R&D can instead claim enhanced R&D intensive support (gov.uk merged scheme and ERIS guidance).
Under the merged scheme the expenditure credit is 20% of qualifying spending. The credit counts as trading income, so it is taxed. For a company paying the 25% main rate of Corporation Tax, the benefit after tax is about 15% of qualifying spending (20% less 25% of 20%, which is 5%). A company paying a lower rate keeps a little more. Under enhanced R&D intensive support, the company deducts an extra 86% of qualifying costs, and can then surrender the loss for a payable credit of up to 14.5%. That works out at up to about 27p for every £1 of qualifying spending (186% times 14.5% is 26.97%). There are also limits on claiming some spending incurred overseas. A provider will check that the right scheme has been used, so use an adviser who knows the post-2024 rules.
Choosing a Lender
R&D advances are offered by specialist finance providers and by some wider business lenders. FundBiz is not a lender and does not arrange finance. Compare offers on the amount lent, the monthly fee, the arrangement fee, the security asked for and the total you would repay.
Ask each provider what happens if HMRC opens an enquiry or reduces the credit. Some will want the shortfall repaid from other funds straight away. Others allow for a set reduction within the amount they held back. Get the answer in writing.
Step-by-step
- Confirm your R&D claim is prepared, or ready to submit, under the right scheme for the accounting period, with a qualified adviser.
- Gather the claim report, the schedule of R&D spending, filed or draft company accounts and recent bank statements.
- Ask one or more providers for written terms based on your claim.
- Compare the amount lent, the monthly fee, the arrangement fee, the security asked for and each provider's policy if HMRC reduces the claim.
- Sign the loan agreement and receive the funds.
- When HMRC pays the credit into the company's bank account, repay the provider as the agreement requires.
Illustrative example
This is a made-up example. The fees are assumptions to show the sums, not market rates. A company expects an R&D payment of £95,000 from HMRC. A provider lends 75%, which is £71,250. The assumed charges are 2% a month on the amount borrowed (£1,425 a month) and a 2% arrangement fee (£1,425).
HMRC pays after four months. Monthly charges: 4 times £1,425 is £5,700. Add the arrangement fee and the total cost is £7,125. The company repays £71,250 plus £7,125, which is £78,375, and keeps £16,625 of the £95,000. If HMRC had taken eight months instead, the monthly charges would have been £11,400 and the company would have kept £10,925.
Frequently asked questions
Does taking an R&D advance affect the R&D claim itself?
No. The advance is a separate loan and has no bearing on whether the claim is valid or how much it is worth. HMRC processes the claim in the normal way and, for claims made on or after 1 April 2024, generally pays the credit to the company itself. The company then repays the lender.
What happens if HMRC reduces or rejects the claim after the advance has been paid?
The company still owes the lender the full amount it borrowed, plus charges. The part of the expected credit the lender did not advance gives some room if HMRC reduces the claim, but if the reduction is bigger than that, the company has to find the difference from other funds. If HMRC has already paid and later finds the company claimed too much, HMRC recovers the overpaid amount from the company. A well-prepared claim lowers this risk.
Can a loss-making company use R&D advance funding?
Yes, if it has a genuine R&D claim that will lead to a payment from HMRC. A loss-making SME that spends at least 30% of its total spending on R&D may claim enhanced R&D intensive support, which can give a payable credit. Other loss-making companies may still get a payment under the merged scheme. The claim still needs to be properly prepared and submitted.
How long does it take to receive funds?
It depends on the provider and on how complete your paperwork is. The provider will want to review the R&D claim, your accounts and your bank statements before it makes an offer. Ask each provider for its usual timescale before you apply.
Is R&D advance funding regulated by the FCA?
Usually not. It is normally a business loan to a limited company, and lending to a limited company is generally outside FCA consumer credit rules. Some providers hold FCA permissions for other products. Check who you are dealing with and read the agreement carefully before you sign.
By Adam Parker, Founder & Managing Director, Muswell Rose. FundBiz is owned and operated by Best Business Loans Ltd, directed by Oliver Mackman. Published .