On 15 July 2015, in a welcome decision, the First-tier Tribunal (in Monitor Audio Ltd v HMRC2) held that, as an “institutional” investor, the presence of a large banking group amongst the shareholders of an otherwise small or medium-sized company (SME) should not result in the company ceasing to be entitled to valuable R&D tax relief for SMEs.

The appellant company encountered financial difficulties after purchasing a business with funding provided by Royal Bank of Scotland (RBS). The company and RBS agreed a debt-for- equity swap pursuant to arrangements whereby, ultimately, an RBS subsidiary acquired 43% of the company’s shares (and 26% of the voting rights). The RBS subsidiary could appoint a non-executive director, whose consent was required for material changes to the company’s business, acquisitions and disposals over certain thresholds, and other key matters. In practice however, the director did not always exercise his rights and was not involved in the day-to-day management of the company.                                                                                     

The Tribunal held that the RBS subsidiary was an “institutional” investor for the purposes of Commission Recommendation 2003/361/EC, which contains a definition of SME adopted for the purposes of the UK’s R&D tax relief rules. An institutional investor’s balance sheet does not need to be factored into the financial tests required to determine whether companies held more than 25% by others still fall within the SME definition.

In the Tribunal’s eyes, the key question was whether RBS (via its subsidiary’s shareholding and non-executive director) was putting the company in a stronger market position than other SMEs. This was not the case, according to the Tribunal, as the director had little or no involvement in day-to-day management.

The decision can be found here.