In DNAE Group Holdings Limited v HMRC [2021] TC08227, the First Tier Tribunal (FTT) found that the claimant company was a Small or Medium-sized Enterprise (SME) for R&D relief. Its main investor was a Venture Capital company so it did not have to include the investors’ assets and employees when assessing its own size.

There are two schemes for claiming Research and Development (R&D) relief, depending on the size of the company:

  • The Small or Medium-sized Enterprise (SME) Scheme, which provides the highest rates of relief.
  • The Repayable Credit Large Company Scheme or R&D Expenditure Credit 'RDEC'.   
  • When assessing whether it is an SME for the purposes of the relief, a company must include the assets and employees of any ‘partner-enterprises’, including shareholders with more than a 25% interest in the shares and voting rights, which are not institutional investors or a venture capital company.

DNAE Group Holdings Limited (DNAE) specialised in research and development into 'point of care' solutions for DNA Gene 6 sequencing detection. It claimed R&D tax credits under the SME scheme.

  • Edith Grove Limited (EGL) a company set up for the purpose, acquired a 24% holding in DNAE. EGL was granted options to acquire more shares if certain milestones were reached. These were exercised increasing the shareholding to over 45%.
  • EGL was part of a larger international group. The parent company was listed in Malaysia, its main activities during the relevant periods consisted of plantations, investment holdings and the provision of management services to its subsidiaries.
  • HMRC concluded that DNAE was not an SME and assessed the company to additional tax on the basis that the large company scheme applied.
    • This was on the grounds that EGL, as a shareholder owning more than 25% of DNAE, was not a Venture Capital Company (VCC) as the investment was made for strategic purposes to benefit the EGL group which was, said HMRC, uncharacteristic of a true Venture Capital Company.
  • DNAE Appealed HMRC's decision.

The FTT allowed the appeal:

  • Whilst not specifically defined, a ‘venture capital company’ will usually exhibit a number of particular characteristics:
    • It invests in high risk, speculative new ventures which promise significant growth potential with a view to high reward.
    • It intends to maximise the return on its investment and has an exit strategy .
    • It focuses on the balance sheet value of the investee company and may offer strategic advice but will not be concerned with the day-to-day management of the investee company’s business.
    • Its obligation or right to inject additional finance may be subject to the attainment of certain objective criteria.
  • The judge did not accept that the investment was to strategically benefit the EGL group. He found that it was opportunistic, the primary objective being to make a speculative, high-risk investment with a view to achieving a high return by some form of exit. Whilst the investment was in the area of genomics, a field in which the group had some experience, particularly in the field of agriculture, any strategic benefit was limited and ancillary, especially as the primary market for DNAE’s work was human testing, not agriculture.
  • EGL itself substantially met the identified characteristics of a VCC so DNAE did not have to take account of its assets and employees and was eligible for relief under the SME scheme.

Useful guides on this topic

R&D Tax Relief: Overview
What is R&D Relief? How does it work? Why does the size of the company matter? What is sub-contracted R&D? How do I write an R&D Report?

R&D: SME Tax Credit scheme
What Research & Development (R&D) schemes are available for small and medium-sized companies undertaking R&D? How to make an R&D claim? What are the qualifying costs and how much can be claimed?

R&D: 'Large Company' Scheme (RDEC) Guide
What is the R&D Expenditure Credit (RDEC) Large Company Scheme for R&D relief? How does it work?

R&D Zone: Can I claim under SME Scheme or RDEC?
Can I claim under the Small or Medium-sized Enterprise (SME) Scheme or R&D Expenditure Credit (RDEC) scheme?

External link

DNAE Group Holdings Limited v HMRC [2021] TC08227 


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