If your business has received outside investment, you may be classified as a ‘linked enterprise’ or ‘partner enterprise’.
Under HMRC’s definitions, your business may be classed as a ‘linked enterprise’ or a ‘partner enterprise’ if there’s a relationship between a common shareholder and the company they’ve invested in. This classification can impact your R&D tax credit claim, and which of the R&D tax schemes that you would qualify for.
In this article, we’ll look at both ‘linked enterprises’ and ‘partner enterprises’, including how they are defined by HMRC and how the enterprise status would affect your R&D tax credit claim.
In This Article:
Linked Enterprises
What is a Linked Enterprise?
HMRC will classify your business as a linked enterprise if another business has control over your company. This happens if another business meets any of three specific requirements set by HMRC:
- Owns more than 50% of your shares or voting rights.
- Can appoint or remove your company’s management or key decision-makers.
- Has the ability to strongly influence your business decisions (“dominant influence”).
If an individual investor meets one of the above three requirements, then you would also need to look at any other businesses in the same industry for which the investor meets the same one of the above three requirements. In that case, you would be a linked enterprise via the investor.
Impact on R&D Tax Claims
If your company is part of a ‘linked enterprise’, you will need to consider your investor’s employee headcount, revenue, balance sheet, and any other company that your investor is ‘linked’ to.
For accounting periods starting on or after 1 April 2024:
- Merged R&D scheme: All companies, regardless of size, will claim through the merged R&D scheme. Therefore, the distinction between the previous SME and RDEC schemes is no longer relevant for the general claiming of R&D tax relief.
- ERIS: The concept of company size remains crucial for the “R&D intensive SME” scheme (ERIS). To qualify for ERIS, a loss-making SME must meet the R&D intensity threshold, meaning 30% or more of its total expenditure must be on qualifying R&D. If you’re a linked enterprise, you’ll need to consider the size and expenditure of any linked companies as well as your own.
For accounting periods commencing before 1 April 2024:
- SME and RDEC Schemes: HMRC uses the company size test to determine whether you’re eligible for the SME Scheme or the RDEC Scheme. To claim under the old SME Scheme, a business should have 500 employees or less, a turnover of less than €100 million per year, and a balance sheet of less than €86m. You’ll need to consider any linked enterprises when carrying out this test.
Partner Enterprises
What is a Partner Enterprise?
A ‘partner enterprise’ is one where a larger business owns between 25%-50% of your SME. This is not a ‘linked enterprise’ because your investor does not have a majority share.
What does this mean for your claim?
For accounting periods starting on or after 1 April 2024:
If you are partnered with another company, their assets, balance sheet, and employee count will proportionately contribute to your own. This is particularly important when considering your eligibility for the Enhanced R&D Intensive Support (ERIS) scheme.
If you do not meet the requirements for ERIS due to partner enterprise status, your claim will instead be processed through the merged R&D scheme.
Example ‘Partner Enterprise’ Calculation
- Your SME has 60 employees and balance sheet of €20m
- Your SME is one-third owned by a larger company that has 1,500 employees and a balance sheet of €300m
Calculation:
- Employee Count for R&D purposes = 60 + (⅓ * 1500) = 60 + 500 = 560 employees
- Balance Sheet for R&D purposes = €20m + (⅓ * €300m) = €20m + €100m = €120m
In order to qualify for ERIS, you’ll need to employ fewer than 500 people and your gross assets must be no more than €86m. As such, you would not be eligible to claim under ERIS.
For accounting periods starting before 1 April 2024:
Partnered status could similarly affect your eligibility for the SME tax relief scheme. That’s because the combined size of your enterprise could push you over the SME threshold, requiring you to claim under the RDEC scheme instead.
Exceptions
There are some exceptions to these rules. If the 25% threshold is met by one of the below investors, you may not be classified as a linked enterprise or partner enterprise:
- Public investment corporations and venture capital investors (VCs),
- Individuals or groups of individuals with a regular venture capital investment activity (“business angels”), who invest equity capital in unquoted businesses, provided that the total investment of those business angels in the same enterprise is less than €1.25 million.
- Universities or non-profit research centres,
- Institutional investors, including regional development funds,
- Autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants.
Businesses can remain autonomous enterprises while having one or more investors listed above. However, each investor must not have a stake of more than 50%, and they must not be linked to each other.
If you’re unsure whether you might be a classed as a linked enterprise or a partner enterprise, get in touch with one of our specialist R&D advisors today and we’ll be happy to help.
