What are linked and partner enterprises?

If you’ve received outside investment from another business, you could be classed as a linked or partner enterprise. ‘Linked’ or ‘partner’ enterprises are terms that HMRC use to define the relationship between a common shareholder and a company it has invested in.

If you have received outside investment and therefore classify as either a linked or partner enterprise, your R&D tax credit claim could be affected. This will impact whether you qualify for the SME R&D tax relief scheme or the Research and Development Expenditure Credit (RDEC).

We’ll now go through how HMRC classifies each enterprise to assist you in determining whether you’ll be affected.

Linked enterprises

HMRC will classify your business as a linked enterprise if your investor can exercise control over your business’s affairs. They have three ways to decipher this. Your investor:

• Has a majority, i.e. owns more than 50% of your shares and your company’s voting rights.
• Has the power to appoint or remove the management, administrative or supervisory body from your company.
• Has the ability to exercise a “dominant influence” over your company.

It’s not just a company that you can be linked to. An individual investor who works in the same or ‘adjacent’ industry to you and owns more than 50% of your shares will make you and your investor a ‘linked enterprise.’ This means that you would be ‘linked’ to any other company your investor owns 50% or more of.

What does this mean for your R&D tax credit claim?

If your company is part of a ‘linked enterprise’, you will need to include your investor’s employee headcount, revenue, balance sheet, and any other company your investor is ‘linked’ to.

This is important because HMRC uses the company size test to determine whether you’re eligible for the SME Scheme or the RDEC Scheme. For instance, to claim under the 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, any business with a bigger company size must claim through the RDEC Scheme.

In most cases, SMEs will claim through the SME Scheme, which allows you to recover 33% of your development costs. However, if you are a larger business, you will claim through the RDEC Scheme, which only lets you claim up to 10% of your costs.

Therefore, the scheme you claim through is entirely dependent on your investor’s employee count and turnover. Being ‘linked’ to your investor could therefore bump you up to the RDEC scheme.

You can also be regarded as an SME if your combined company size falls within the SME scheme limit.

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 R&D tax credit claim?

If you are partnered with another company, their assets, balance sheet, and employee count will proportionately contribute to your own. As a result, the amount you contribute is determined by how much of your business your partner owns.

For example, if your SME, which has 60 employees and a balance sheet of €20m, is 33.33% owned by a company with 1500 employees and a balance sheet of €259m, your employee count would be 500 + 60 and €86m + €20m of their balance sheet. This would take your employee count to 560 and balance sheet to €106m, which classes you as a large company.

Alternatively, if you were 33.33% owned by a company with 500 employees and a balance sheet of €150m, your employee count would be 167 employees and a balance sheet of €70m, which keeps you within the SME scheme limits.

Even if you were to be classified as a large company, there are expectations to the rule outlined below.

Exceptions to the rule

There are some exceptions to the rule. Even if the 25% threshold is reached or surpassed by the below investors, you and your investor might not be classified as a linked or partner enterprise:

1. public investment corporations and VCs,
2. individuals or groups of individuals with a regular venture capital investment activity who invest equity capital in unquoted businesses (‘business angels’), provided the total investment of those business angels in the same enterprise is less than €1.25 million,
3. universities or non-profit research centres,
4. institutional investors, including regional development funds,
5. autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants.

businesses can remain as 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 are still unsure if you might be a linked or partner enterprise, get in touch with one of our specialist R&D advisors today and we’ll be happy to help.