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R&D Tax Credit Lending – What is the addressable market?
Last week HMRC released their annual statistics concerning Research and Development Tax Credits.
This is a yearly publication produced by HMRC and provides information such as the number of UK companies claiming R&D Tax Credits, the associated cost to the Exchequer and also provides meaningful insights into how those claims are made up such as reporting on the geographic locations of claimant companies, as well as providing industry sector analysis.
The number of SME claims for the 21/22 tax year totalled 79,205 according to HMRC, 41,745 of which resulted in a claim that included a payable tax credit, it is this type of claim that Buzz Capital is particularly interested in. We can provide no-dilutive advance funding to businesses that might be concerned about the turnaround times at HMRC and the time it takes for HMRC to process a claim and action repayment.
Of the 41,745 SME claims we are told that first time applicants in the SME scheme are trending downwards with 16,240 being the number of first-time applicants for 20/21, which was a 3% decrease from 19/20. Similarly, there was a drop off in 19/20 from the height of first-time applicants in 18/19.
So, if we make an assumption that, of the 41,745 claims resulting in a payable tax credit, we conservatively estimate that, say, 15,000 are first time claims, being a 7.5% reduction from 20/21. This would mean a provisional addressable market of 26,745 claims on which R&D tax credit lenders can use as collateral on the understanding that first time claims are potentially too risky to lend against, subject to the quality of the qualitative supporting information.
We must then consider the size of the claims and the fact that the majority of R&D Lenders in this space, Buzz included, usually have a minimum collateral requirement to allow for a minimum loan amount of £50k. To that end, when evaluating the cost band analysis from HMRC for 21/22, we would estimate that only up to 20% of SME claims resulting in a payable tax credit ultimately end up being a prospective borrower due to the standard minimum loan size in the industry.
We estimate that, based on the 21/22 data, there are around 5,349 prospective borrowers in the UK who might be looking for advance funding of more than £50k secured against their R&D tax credit claim. This number will be reduced further when we consider other relevant inputs such as any ceiling on a single loan amount, thus ruling out the potential borrowers with very large rebates and, most obviously, the understanding, appetite and willingness of borrowers to explore such a solution compared to other borrowing options, be that debt of equity-based alternatives. Naturally not all prospective borrowers will be interested or be aware of the solution being offered.
Finally, these statistics have been released at a time when it has recently been reported that almost 50% of R&D claims submitted since the 8th of August are invalid due to the fact that not all claimant companies have been aware of the new mandatory Additional Information Form (AIF), required for all claims from the 8th of August onwards.
As a side note, the statistics for the 21/22 tax year show that the average claim size has seen an uplift of 9% for the SME scheme so, by not completing the AIF as required, this is potentially an increasingly costly mistake for business owners.
So, with all of that in mind, if we apply a 50% discount to capture remaining addressable claims that have been completed in error or, are worse, potentially fraudulent, these are naturally not going to pass any decent underwriting process thus making any loan application unviable for lenders.
In conclusion, based on the abovementioned analysis we estimate that the total addressable market for R&D borrowers could be in the region of 2,500 claims a year, around 200 per month, discounted further by the number of borrowers who are not attracted to such a facility, which may well be material.
In short, there are not many prospective deals to go around in what is a competitive market place. It is therefore up to those able and willing to help UK innovation to communicate the proposal that is being offered more effectively making sure R&D agents, accountants and borrowers themselves are aware of all of the options available to them, sometimes in advance of their year-end and before any claim has crystalised.
With that said, Buzz Capital are really proud to have assisted many innovative companies over the years and want to continue doing so by offering quick and straight forward funding options.
We are well positioned to continue to do that and are uniquely positioned in that sense because we are not reliant on any external funding capital at all. We simply deploy our own cash reserves so it is a completely different model to that of other lenders, with much less risk. This enables us to move forward quickly and flexibly, something that has been well received by borrowers.
Please note that you can get your funds now with a short term and non-dilutive loan from Buzz Capital. We will be pleased to have a confidential, no-nonsense and straightforward discussion surrounding your cashflow requirements.
The link to our loan application form is noted below for ease and you will always have a dedicated person in our team to discuss your application with.
Apply for an R&D tax credit loan – it takes less than 5 minutes
If you have any questions or would like to discuss further, please contact either Joe or Alena at the following addresses: