The increasingly critical position taken by HMRC towards R&D tax claims poses a hidden risk for investor groups like VCs who are backing fast-growth tech firms, but is one that few have likely considered. If a portfolio company misfiles an R&D tax claim, the fallout can travel directly up the chain to the investors who backed it.
As the R&D scheme remains an important source of non-dilutive funding among ambitious tech businesses, investors need to be aware of the bigger picture.
The hidden risk in your portfolio
HMRC’s approach to R&D tax relief follows a pay-first, enquire-later model. That means a business can receive a substantial payment for their claim and only receive an enquiry once a few months have passed. If that claim is found to be non-compliant, HMRC will seek repayment, often with interest and penalties, but in so many cases, the claim money will likely have already been invested.
So for a high-growth portfolio company operating on tight margins, an unexpected HMRC repayment bill can be existential. And if it tips a business toward insolvency, the investor’s capital goes with it.
The enquiry rate across the industry has risen fivefold since 2022, with one in five claims now receiving scrutiny. It’s important for investors, therefore, that their portfolio companies follow HMRC’s digital-first approach to ensure they claim accurately, honestly and compliantly first time around, to help future-proof their investments and avoid repayments that could put the future of their valued portfolio at risk.
An active HMRC enquiry can trigger a string of consequences for the business and their investors:
- It can halt or delay an acquisition, as prospective buyers will use it as leverage to push down the purchase price
- This liability means capital that was earmarked for growth may need to be reserved against an HMRC repayment
- It can erode trust with lending partners, other co-investors and prospective acquirers conducting due diligence
- Responding to an HMRC enquiry is time-consuming and expensive
Portfolios can’t rely solely on accountants
Many of the businesses in a VC’s portfolio will be handling their R&D tax relief through their accountant. But this is where many of the risks originate.
R&D tax credit legislation is complex and increasingly subject to HMRC scrutiny, and a generalist accountant is not a specialist in this area. There is a high chance that two accountants will arrive at different claim values, and the documentation they produce may not withstand an enquiry.
For a VC that has invested millions into a business, allowing that level of inconsistency and risk into the claim process is a serious problem. But partnering with specialist R&D experts provides a whole different level of reassurance, and companies like EmpowerRD bring additional benefits like:
- Structured, technology-led process with consistent output
- Real-time claim visibility throughout the process
- Clear audit trail built into every claim
- Specialist expertise captures the full scope of qualifying spend
- HMRC enquiry rate below 5%
What active portfolio oversight looks like
The ultimate goal for investors is to get more bang for their buck – but this will only happen when claims are done properly. There’s also a real incentive for investors to encourage portfolio companies to follow HMRC’s digital-first strategy and build a system that makes R&D claims easier, more efficient and more robust in the long run.
For investors, the response doesn’t need to be micromanaging the process. All that’s needed is clear visibility over whether their portfolio businesses are working with advisors who provide the visibility, rigour and compliance standards their investments deserve.
R&D tax credits represent a significant source of non-dilutive capital for innovative businesses. When done well, they support growth without giving up equity, but when done poorly, the business puts themselves at risk that can unravel everything an investor has worked to build.
To find out how EmpowerRD supports investors and their portfolio companies, get in touch with our team.
