Brexit and R&D Tax – What’s the impact for UK Businesses
Britain’s decision to leave the European Union sent shockwaves through the UK economy and beckoned a period of intense uncertainty. Until Britain’s new relationship with the EU is defined and new trade deals implemented, many UK-based businesses will be preparing for the unknown. This is especially relevant for businesses that benefit from the UK’s R&D tax relief schemes.
HMRC’s R&D tax credit schemes have always been intended to encourage innovation in the UK and increased spending on R&D activities. An incentive adopted by most major economies, R&D tax schemes demonstrate that the country in question is an attractive place to do business.
Initially only available to SMEs, the UK R&D tax schemes now extend to companies of all sizes providing that they are investing in qualifying project activities, are a going concern and are subject to Corporation Tax. Essentially, they offer businesses reductions in payable corporation tax, or even cash credits in some instances, against costs incurred whilst developing new, or improving existing products, services or processes.
What does Brexit mean for R&D tax right now?
At the moment, the result of the EU referendum does not have an immediate impact on the R&D tax schemes.
A common misconception is that the funding for UK R&D tax credits comes from the EU. In reality, it’s the UK Government providing the funds for the R&D tax schemes, so this will not be affected by the decision to leave the EU.
The news that George Osborne is planning to reduce corporation tax to 15% is, however, an indication that Government is already encouraging businesses to remain in the UK. Whilst a corporation tax reduction will have an impact on the net tax benefit available for SMEs under the R&D tax schemes, given that claims are submitted retrospectively and are linked to the corporation tax rates in the year the expenditure occurred, this will not have an immediate impact on businesses’ R&D tax relief.
This planned alteration to corporation tax should be taken as positive news. It means changes are being made to maintain Britain’s attractiveness for businesses. This could mean that similar amendments are on the cards to improve the generosity of the R&D tax schemes, in order to encourage continued investment in the UK during a highly uncertain period.
What will the impact of Brexit be longer-term?
Once Article 50 is triggered and our two years of negotiations are complete, the UK will officially leave the EU. At this point the UK’s R&D tax schemes will no longer be bound by EU regulations.
One element that may be affected by this change is the impact of the EU’s State Aid regulation on UK R&D tax. At present, businesses that have successfully received other State Aids supporting their innovation have had to reduce the value of their R&D tax claims because of EU State Aid regulation, meaning they received less tax relief.
In a post-Brexit world, the Government will be able to determine exactly how it wants its R&D tax schemes to be structured, with no restrictions from Europe. This could well result in more generous and inclusive R&D tax schemes.
Naturally we don’t know exactly what the post-Brexit Government will choose to do. However, businesses should be reassured that we are highly unlikely to see any government put a stop to the R&D tax schemes.
With investments in innovation having a significant impact on GDP and private rates of return averaging 30 per cent, it’s immediately clear why you would want to continue to incentivise R&D and innovation expenditure. In reality, now more than ever, we will need to be ensuring that the UK remains an attractive place to invest in innovation. Given that the UK’s schemes are currently less generous than elsewhere in Europe (France and the Netherlands are particularly lucrative) we will need to do more to continue to attract international investment and maintain strong business growth. From our perspective, businesses should be reassured that the outlook for R&D tax relief in the UK is a positive one.