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R&D Tax Credits: Linked and Partner Enterprises Explained

If your company has strong financial ties to other businesses, you may be classified as a linked or partner enterprise. This could have a significant impact on your R&D Tax Credits claim. 

If your company has considerable connections to other businesses, you may be classified as a ‘linked’ or ‘partner’ enterprise. 

This is important because if you are found to be a linked or partner enterprise, it could impact your R&D Tax Credits claim. 

Specifically, it could affect whether your company is eligible for SME R&D Tax Relief, or the far less generous Research and Development Expenditure Credit, aka RDEC. 

You can read more about which of the two schemes you should be applying to, here.

Let’s looked at what constitutes a linked or partner enterprise, and how it would affect your claim. 

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Linked Enterprise

In short, your company is considered a ‘linked enterprise’ if another business:

  • Owns more than 50% of your company’s voting rights
  • Can appoint or remove a majority of your management team
  • Can exert a “dominant influence” over your company

Basically, if another business controls your company, you are ‘linked’.

Alongside this, it is possible that you can be linked through an individual investor, providing you are both in the same industry.

A good example of this is if you were running a small SME airline and Richard Branson personally owns 51% of your company. In that case, you are also linked to any other companies of which he owns 51% or more.

If your company is linked to another, you must include the personnel and finances of the linked businesses, plus those of any other firms that business is linked to, when you take the company size test. 

The size test is what decides whether you count as an SME or a large business for the purposes of R&D Tax Credits. You can read more about it here

So, it’s perfectly possible that, although your company is an SME by any traditional standard, being a linked enterprise could push you into the large company bracket. 

This means you’ll have to apply for the RDEC scheme instead of SME R&D Tax Relief, and earn much less funding. 

Partner Enterprise

A partner enterprise is one that owns between 25% and 50% of another business. A significant share. But not a controlling stake. 

Here’s an example. If PartnerCo owns 30% of your business, you are a partner of PartnerCo. But, because they don’t control you, you are not linked.

So what happens then?

Well, if you are partnered with another company, you have to add a fraction of its staff, turnover and balance sheet to your own when taking the company size test. 

How much you add depends on how large a share your partner owns of your business. 

If your partner owns 25% of your company’s shares, you’ll add a quarter of its staff and assets. If it owns 50%, you’ll add half. 

For example, if PartnerCo owns 30% of your business, and their balance sheet is worth €10 million, you would add €3m to your balance sheet. 

If you had a balance sheet worth €1 million, adding the two together would result in €4m. That’s still well within SME territory

Conversely, if you were 30% owned by PartnerCo when they had a balance sheet worth €1 billion, your aggregate would be €301m. In that case, you’d be classified as a large company.

Thankfully, investment corporations and venture capital firms are not counted as partners. Even if they between 25% and 50% of your business. 

In fact, HMRC explicitly allows a number of organisations to own up to 50% of your business without designating them a partner enterprise. 

These organisations are: 

  • Public investment corporations and VCs
  • 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
  • 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

Questions?

Still confused? We’re here to help!

Our R&D Tax Credits experts are happy to advise you on your claim. And to help you navigate the rules around linked and partner enterprises. 

Just get in touch, and one of our team will be right with you. 

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