R&D tax relief and external investment: understanding the impact on eligibility and value

Access to external investment is a key driver of growth for many innovative UK businesses, enabling them to accelerate development, expand capability and bring new products or services to market. A common concern, however, is how this investment may affect eligibility for research & development (R&D) tax relief.

In most cases, attracting investment does not prevent a company from claiming but it can influence how relief is calculated and the level of benefit available. As a result, understanding how company size and ownership structure interact with the R&D regime is critical.

Why company size still matters

Following the introduction of the merged research and development expenditure credit (RDEC) scheme from April 2024, the legislation has been simplified in some areas. However, company size remains a key factor in determining access to relief and the rate at which it is received.

For R&D intensive SMEs, enhanced relief may be available through the Enhanced R&D Intensive Support (ERIS) regime at a higher effective rate than the standard merged RDEC. Determining whether a business qualifies as an SME requires consideration of both financial metrics and group structure.

Typically, SME status is based on:

• Fewer than 500 employees; and
• Either turnover of €100m or less, or a balance sheet total of €86m or less

Importantly, these thresholds must be assessed on a combined basis, taking into account any linked or partner enterprises.

Crucially, when determining whether a company is R&D intensive (the qualifying intensity varies in different accounting periods, and transition rules apply), the expenditure of connected entities need to be considered, too.

The impact of external investment

The presence of external investors does not automatically disqualify a company from SME status or enhanced relief. However, the nature and level of investment can affect how the business is assessed.

The key consideration here is how ownership and control are structured, rather than simply that investment has been received.

Shareholdings below 25%

Where an investor holds less than 25% of shares or voting rights, the company is generally considered independent. In these cases, the investor’s size is typically disregarded, and access to SME or ERIS relief is usually preserved. This is common in early-stage funding rounds.

Shareholdings of 25% or more

Where ownership reaches or exceeds 25%, further analysis is required. The classification of the investor becomes critical:

• Venture capital and certain institutional investors can often be treated as exempt from aggregation rules, meaning their size may not affect SME status
• Other types of investors, such as private equity groups not qualifying for exemption, may be treated as linked enterprises, potentially impacting eligibility

This distinction can significantly alter the level of R&D support available, from approximately 26% net benefit down to 15 %.

A more structured approach to eligibility

As HMRC continues to refine its approach, businesses should adopt a more detailed and proactive assessment of their position.

Key areas to focus on include:

Ownership and control

Understanding voting rights, shareholder agreements and decision-making authority is essential in determining whether a business remains independent for R&D purposes.

Investor classification

Identifying whether an investor qualifies as a venture capital or institutional investor is a critical step in applying the correct treatment.

Documentation and evidence

Maintaining clear records of investor intent, governance arrangements and the absence of control can support a robust and defensible position.

Aligning R&D relief with wider innovation strategy

R&D tax relief should be considered as part of a broader innovation funding strategy. For many businesses, particularly those in high-growth or capital-intensive sectors, combining relief with grants and other incentives can significantly enhance overall funding efficiency.

Sectors such as technology and software, advanced manufacturing and life sciences continue to benefit from a strong alignment between innovation activity and available tax incentives. In these areas, effective use of R&D relief can:

• Improve cash flow during critical development phases
• Support scaling and commercialisation
• Strengthen investor confidence by improving project economics

Getting it right

To maximise the value of R&D tax relief in the context of external investment, businesses should:

• Review ownership structures and shareholder arrangements as part of claim preparation
• Assess the nature of investors, not just their level of shareholding
• Consider the R&D implications when negotiating investment terms
• Ensure that governance and control positions are clearly documented

Taking these steps early can help avoid unexpected changes to eligibility and ensure that relief is optimised.

Supporting innovation through clarity and planning

While the R&D landscape continues to evolve, external investment and tax relief remain complementary rather than conflicting. With the right structure and advice, businesses can continue to access meaningful support for innovation while pursuing ambitious growth plans.

We’re here to help

At Azets, we work with innovative businesses to align R&D tax relief with investment strategy, ownership structures and long-term growth objectives.

From assessing SME status to navigating complex group structures, our specialists provide practical, tailored advice to help you maximise value and maintain compliance.

Get in touch with our specialist R&D tax relief team to discuss how your investment position may impact your R&D claim.