The Future of the Future Fund
Here we look at how the Future Fund has evolved, who can benefit and how it relates to R&D.
Driving economic recovery
Post-pandemic recovery will be driven by the UK’s most innovative companies - indeed it’s the key to future economic success. Since its launch in the spring, the Future Fund has been crucial in supporting these companies, shoring up nearly 16,500 jobs across the firms who have successfully achieved convertible loan agreements.
Administered by the British Business Bank, 1,243 applications have been received in total (as of the 20th October 2020). This has brought about a 59.9% acceptance rate for the scheme, providing 745 companies with funding to the tune of £771 million.
Originally the Future Fund was set to close on the 30th September 2020. However, the government has recently announced it will be extended until 31 January 2021.
What is the Future Fund and who is eligible?
The Future Fund is one of a tranche of COVID-19 business supports unveiled by the UK government earlier in the year. The government essentially gives loans worth between £125,000 and £5 million to early stage, high-growth UK companies to assist them during the coronavirus outbreak. However, the funding is subject to at least equal match funding from private investors.
Convertible loans that are provided under the scheme could be a viable option for businesses that a) rely on equity investment and b) have been unable to receive any other coronavirus support because they are either pre-revenue or pre-profit.
The scheme is open to all UK businesses where at least half of the workforce is UK-based. They must also derive more than 50% of their revenue from UK sales, and have been incorporated on or before the 31st December 2019.
In addition to the above, companies must:
- Be able to attract private investor funding equal to at least the loan provided by the government
- Have raised a minimum of £250,000 in equity investment between the 1st April 2015 and the 19th April 2020. Shares must have been issued to third-party external investors for cash (not employees, founders, consultants or other parties that may be connected)
Note that if a company is part of a group, applications to the Future Fund can only be made by the parent company.
Is there room for negotiation?
To some extent, yes. Although the government has set very specific terms for Convertible Loan Agreements, there are four areas where negotiation is permitted with private lenders. This will have an impact on how much a company can benefit.
The four areas are:
- The loan interest rate (set at a minimum of 8%)
- An optional investor-set valuation cap on conversion
- The conversion discount rate (at least 20%)
- Space to negotiate on investments made within 90 days of the Future Fund note (although amounts raised this way will not be matched by the Future Fund)
Criticism of the scheme - and what of its future?
The government has confirmed that the Future Fund is definitely now open until the 31st January. Whether it will be again be extended beyond this date is difficult to predict, although it has largely been welcomed by Covid-weary businesses this year.
Despite this, state involvement in business affairs, even in a pandemic, was always going to be a sticking point - especially in a free-market economy. Whilst there are clear benefits in the short term for companies in their infancy, the impact of artificially replicating pre-pandemic levels of liquidity over the long-term is largely unknown.
The fact is that start-ups by their very nature are precarious and even in ‘normal’ times a sizeable proportion don’t survive their first or even their second year. Three-quarters of start-ups that raise seed funding never make it beyond a Series A (the crucial first stage of venture capital financing). Investors actually only expect 20-30% of start-up investments in their portfolio to be a success. Given this instability, many have argued that with a large number of start-ups failing, what is the point of investing in them to innovate? Surely that’s actually a waste of taxpayer’s money.
There will always be risks when investing in start-ups particularly, and the true benefits of this scheme may not be felt for many years to come. In this way, the Future Fund is no silver bullet; rather a ‘chicken and egg’ situation. Having said that, the fact remains that SMEs are the backbone of the UK economy, driving job creation and economic growth; vital to post-coronavirus rebuilding.
Can my client claim R&D Tax Credits if they receive Future Fund investment?
The R&D Tax Credits scheme has been around since the year 2000 and is a government-back tax incentive for companies to grow and innovate. It’s a popular scheme due to the fact it’s open to all UK companies regardless of size or sector, and even the smallest of innovative projects can qualify.
The scheme works by allowing organisations to claim back a proportion of their recent R&D expenditure. This is either administered as a reduction in their Corporation Tax liability, or (for loss-making companies) as a lump sum credit.
The amount that can be claimed depends on the gross assets and turnover of the company, and how many people it employs. Generally speaking, smaller companies (those with a turnover of no more than €100 million, gross assets of under €86 million, and fewer than 500 staff) will claim under the SME branch of the scheme. This can generate relief of as much as 33 pence for every £1 of R&D expenditure which is highly generous indeed. Larger companies (those that exceed these thresholds) will need to claim under the RDEC scheme. It’s less generous but claims tend to be more substantial.
The only issue is that sometimes SME claimants will need to claim under RDEC, due to the fact that previous state aid funding has been received. Fortunately however, as Future Fund investment is provided as convertible loan notes courtesy of the government and private investors, it’s actually considered ‘commercial’. This means it will not impact your client’s eligibility for R&D Tax Credits.
As with other COVID-19 government supports, the Future Fund is subject to change at little notice. It’s therefore recommended accountancy firms stay updated by referring regularly to the government’s Future Fund page.
You can also find out more about R&D Tax Credits, including eligibility and how to apply, on our R&D Tax Credits page.
Get in touch
The R&D tax specialists at Myriad Associates developed the Tax Cloud portal back in 2017. It’s a highly efficient, flexible way of putting together an accurate, HMRC-approved R&D tax relief claim and is outstanding value too.
Give your clients a more comprehensive service using the Tax Cloud portal, or of course you can speak to our team for advice on 0207 360 4437. Alternatively please feel free to use our contact page to send us a message.