R&D tax credit loans: advance funding against your expected R&D claim

An R&D tax credit loan is a short-term advance secured against the cash a company expects to receive from HMRC for a valid R&D tax relief claim, repaid in one sum when HMRC pays. The lender reviews the claim, estimates the amount likely to be paid, and advances a proportion of it. When the payment arrives, it clears the advance and the lender's charges, and any balance goes to the company.

Lenders offer two broad types of facility:

• Post-submission advances. The claim has been prepared and filed with the company tax return, and the company is waiting for HMRC to process it. This is the simpler case for a lender, because the claim value is known.
• Pre-submission or in-year advances. Some lenders will advance against qualifying spend as it is incurred during the year, based on management accounts and the adviser's forecast of the claim, sometimes in several drawdowns. This suits companies that cannot wait until after the year end, but lenders advance a smaller proportion because the final claim is not yet fixed.

An important point is that only claims that produce cash can be funded. Under the R&D relief rules, a loss-making company can often receive a payable credit, and a company that has already paid corporation tax may receive a repayment. Where relief simply reduces a future tax bill, there is no payment from HMRC to lend against. The rules have changed significantly in recent years, so ask your adviser how your claim will be paid out; HMRC's own guidance on R&D tax relief is the authoritative source.

R&D tax credit loans fund money HMRC is expected to pay you, whereas tax bill funding helps you pay money you owe HMRC. If your company needs to spread a VAT, PAYE or corporation tax bill, our page on HMRC loans is the right place to start. The two can sit side by side: a company waiting for an R&D payment may also have PAYE and VAT due, and lenders will look at both, because HMRC can set amounts the company owes against a credit it is due to pay.

R&D tax credit loans suit companies that carry out qualifying R&D, expect a cash payment from HMRC and need the money before HMRC is likely to pay. Typical users include:

• software, technology and digital product companies with significant development payroll; see our pages on technology and media finance and software company funding;
• engineering and manufacturing businesses developing new products or processes;
• life sciences, medtech and clean technology companies with long development cycles;
• venture-backed companies that want to extend runway between funding rounds without issuing more shares;
• companies with a track record of R&D claims that HMRC has paid without dispute.

It is less suitable, and often not available, where:

• the company is profitable and the relief only reduces its tax bill;
• the claim is under HMRC enquiry, or the company has had previous claims reduced or rejected;
• the claim has been prepared without supporting technical and cost evidence, or by an adviser lenders will not accept;
• the business is a sole trader or partnership, since R&D relief is a corporation tax relief for companies;
• the company has significant HMRC arrears that could be set against the payment.

For a company with a filed claim, a clean history and an adviser the lender already knows, decisions can come within a few working days in straightforward cases. A first claim, a new adviser or an in-year facility usually takes longer, because the lender needs to review the claim in more depth and may ask questions of the adviser. How long HMRC then takes to pay is outside anyone's control and varies from claim to claim. That uncertainty is the reason the product exists, and it is also why lenders set a maximum term and charge more if a payment is delayed.

The main security for an R&D tax credit loan is the expected HMRC payment, supported by arrangements that make sure the payment reaches the lender. Depending on the lender, this can include a debenture over the company, an assignment or charge over the claim proceeds, and an agreement to have the payment made into an account the lender controls or to pass it on as soon as it arrives. Personal guarantees from directors are common, though some lenders waive them for well-funded companies with strong claim histories. If HMRC reduces or rejects the claim, the company remains liable for the full advance and charges, and the lender will look to the company and any guarantors for the shortfall. Our guide to personal guarantees explains what that means for directors.

The cost of an R&D tax credit loan usually depends on how much is advanced and how long it is outstanding before HMRC pays. Lenders structure charges in different ways: interest or a monthly fee that accrues on the advance until repayment, an arrangement fee, and sometimes a minimum charge period, so a fast HMRC payment does not reduce the cost below a floor. Some lenders express their fee in relation to the claim value rather than the advance. Because the whole balance is repaid in one sum, there are usually no monthly repayments, but charges keep accruing while the claim is processed, and a long delay or an HMRC enquiry can increase the total materially. When comparing offers, model the cost at the expected payment date and at a later date as well.

If an R&D advance does not fit, or is not enough on its own, other options can fund a development-led business:

• Working capital loans for companies with trading income that can support monthly repayments; see working capital loans.
• Revenue-based finance for businesses with recurring subscription or contract revenue; see revenue-based loans.
• A revolving credit facility for ongoing peaks and troughs; see our revolving credit facility page.
• Invoice finance where the company sells to other businesses on credit terms; see the invoice finance hub.
• Grants and equity investment, which we do not arrange but which many R&D-led companies use alongside debt. Our guide to business grants versus business loans explains how they differ.