As the businesses we work with go through funding rounds, we know that they get increasingly adept at dealing with Financial Due Diligence (FDD). It can seem like each time there is a new and even more obscure question that risks wasting time, changing the shape of the deal, or worse, losing it completely. For businesses where R&D is the platform that is now being commercialised or where it is a key driver of the need for investment, there is a playbook that can be followed. This not only protects the deal but can also enhance it.
Common R&D questions during FDD
When assessing our clients, the most common and the most basic question from FDD providers is whether the R&D claim is accurate. Accuracy can be tested in several ways:
- Administrative questions consider whether the R&D claim has been submitted correctly from a tax perspective. This is easy to demonstrate and should be a binary yes or no.
- Appropriateness questions ask if claim values are fair and reasonable. Depending on the stage of the business, there can be huge variations in what fair and reasonable means, so a benchmark can be challenging when just looking at a set of numbers. The question is asked to assess the risk of an HMRC enquiry, fundamentally to establish if there is a potential that R&D tax relief has been overclaimed.
- Technical questions help clarify if the claimed R&D meets the HMRC definition of R&D. We are seeing this more frequently with clients as a recent period of instability from HMRC that has lived long in the memory. This can be a challenge as the last thing companies want in the FDD is justifying technical aspects of their R&D to an accountant.
How to prepare for the FDD
For growing businesses going through seed right the way through to high-value series rounds, being investment-ready should be in their fabric.
From what we see, the smoothest fundraises happen when R&D isn’t treated as a last-minute tax exercise but as part of the business’s core story. When companies can clearly link what they’ve built, why it matters, and how it drives future growth, backed up by solid documentation and consistent messaging, R&D stops being something advisors question and starts becoming something that builds real confidence in the deal.
Great preparation includes the real-time capture of projects, with a thorough and logical definition of the innovation being sought, all documented alongside the governance that surrounds it. The impact of bad preparation can be to slow down the process and, in some cases, chip away at the price.
How to present R&D during the FDD process
During the FDD process, R&D should be seen as an asset, rather than a liability. Great preparation and great presentation help build confidence in your R&D. Working through the common questions that we see in reverse order:
- Technical presentation should contain clear, succinct messaging right from the investment memorandum through to the R&D tax relief claim that was submitted. Controlling the story in a concise, consistent way from the outset helps mitigate any unnecessary, dumb questions later down the line from the FDD provider. Secondly, this demonstrates to the provider that you are comfortable with the HMRC tests and know that the projects claimed for are compliant.
- Appropriateness of the financial report is often the FDD provider’s most comfortable challenge, and I would always expect their focus to be here. Preparing for questions in this area is about knowing what methodology was used. Ideally, there will be time tracking, but if not, being clear about what the process was to determine the numbers. This is the question you want, instead of the specifics of why you applied this percentage to one person.
- Administrative questions should be asked and answered. Check out our guide on the administrative requirements associated with R&D tax relief.
With so much on, outsourcing R&D tax relief advice for high-growth businesses should be seen as appointing a business partner who really understands the dynamics at play through funding rounds and FDD. A great advisor should save you time and assure you that your R&D tax credit is an asset, not a liability for investors.
