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Optimising R&D Tax Position and CFC/PFIC Analysis for Successful Fundraising: A Case Study

Optimising R&D Tax Position and CFC/PFIC Analysis for Successful Fundraising

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In early 2024, a university spin-out Life Sciences company was seeking to raise funds following positive indicative data from their academic research. At that time, they were operating a simple company structure with very little by way of operational processes, particularly in the areas of R&D tax relief, vendor selection research (relating to the new R&D tax relief scheme requirements) and guidance around incentivising their US non-executive Directors (NED). To maximise their chance of effective tax compliance and retaining essential scientific talent, they needed to implement a robust vendor selection methodology, improve their record keeping and ensure they were considering the complexity of US tax regulations for US citizens owning shares in passive foreign investment corporations. Delivering these would allow them to continue the development of groundbreaking, first-in-class oncology therapies.

FD’s Approach

FD’s tailored approach provided a comprehensive, tax-efficient solution to address the company’s challenges and ensure compliance with both UK and US regulations.

  • Detailed Analysis: We conducted a thorough analysis of the company’s planned subcontracted R&D expenditures, reviewing contracts and development vendor selection research evidence to ensure compliance with HMRC new guidance, maximizing the benefits under the R&D scheme.
  • Grant Management: We carefully separated grant-funded expenditures from other costs to ensure accurate claims and compliance with funding requirements.
  • US Tax Compliance: We performed CFC and PFIC analysis to meet the US NED’s (non-executive Directors) requirements, avoiding potential heavy penalties and onerous IRS reporting for the individual.
  • Quick Turnaround: We moved from the initial consultation to execution in just three weeks, delivering a clear roadmap and addressing all identified issues efficiently.

Ensuring Investment Readiness

Our swift, cost-efficient approach gave the founders the confidence to move forward with their investment plans, laying a solid foundation for long-term success and stability. They could proceed knowing their planned R&D spend would qualify for relief and deliver the projected tax credit—significantly extending their cash runway. Additionally, the long-term incentivization of their US NED allowed for the quick onboarding of exceptional scientific knowledge, guiding their ongoing development work, undoubtedly contributing to the success of the work into the future.

  • Risk Mitigation: We addressed uncertainties in the rapidly evolving world of R&D tax relief legislation and guidance.
  • Strategic Growth: By ensuring compliance with US tax regulations, we positioned the company to meet the US NED’s requirements, enabling them to onboard and retain essential strategic talent.
  • Speed and Expertise: Our familiarity with similar transactions and ability to act quickly helped complete the end-to-end process within three weeks.
  • Cost Efficiency: Our guidance provided a sensible, logical approach that kept costs reasonable for a venture-funded company with a limited cash runway.

Results

  • Deliverables: The guidance and advice provided relating to the subcontracted R&D expenditure and PFIC/CFC analysis was crystalised in comprehensive memorandums for the company to retain as evidence should the relevant tax authorities investigate this matter in the future.
  • R&D Tax Credits: For the 2024 year end, the company was able to claim a payable R&D tax credit of £948,000 under the R&D tax relief system with surety that the expenditure included met the required legislative tests.
  • Improved Efficiency: Developed and implemented streamlined processes for managing capital and grant funded expenditure in future periods, improving the efficiency of forward-looking R&D tax relief claims.
  • Compliance Rates: Achieved full compliance with HMRC and US tax regulations across a range of complex and nuanced areas, avoiding potential penalties and improving management confidence.
  • Investor Confidence: By ensuring compliance with UK and US tax regulations, the company was able to evidence their professionalism to their investors, enhancing their financial stability and growth prospects.
  • Ongoing Relationships: Frazier & Deeter is committed to supporting our clients and have regular quarterly check-ins with the company to provide comprehensive and pragmatic guidance.
  • Ecosystem Introductions: Through our quarterly business reviews, Frazier & Deeter has been able to leverage our industry relationships, making timely introductions to complimentary service providers across the legal, banking and financial management industries at no cost to the company.

Conclusion

By partnering with Frazier & Deeter, the company successfully navigated complex funding and tax schemes, ensuring compliance with both UK and US regulations, maximizing R&D tax credits and enhancing operational efficiency. Our deep understanding of the life sciences sector provided valuable insights into the strategic needs of the business. This enabled us to connect the company with our extensive network of professionals in legal, banking and financial management, delivering a comprehensive and holistic business solution.

If you are a life science company looking to navigate US funding and tax schemes, ensure compliance with international regulations, and maximize operational efficiency, Frazier & Deeter is here to help. Contact us today to discover how our expertise and comprehensive business solutions can support your strategic goals and drive long-term success.

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