Small or medium-sized enterprises (SMEs) in financial difficulties will be reassured by a First-tier Tribunal (Tax Chamber) decision concerning research and development (R&D) relief.

The tribunal held that debt restructurings, such as debt-for-equity swaps, should not lead to a loss of R&D relief, as long as the investor leaves the day-to-day management of the business in the hands of the existing management team.

In this case, a company remained entitled to R&D relief as a SME despite a banking group being a substantial shareholder. The group’s shareholding was such that, absent any exemption, the group’s balance sheet would have to be taken into account in applying the SME limits (leading the company to lose SME status). However, the group was an “institutional investor” and was therefore ignored for these purposes as it was not involved in the day-to-day running of the company, and did not provide the company with financial strength or advantage exceeding that of other SMEs.

Please note that the above does not constitute legal advice.