How Will Brexit Affect R&D Tax Credits?

R&D Tax Credits and Brexit
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With Brexit less than four months away, I analyse how this major political and economic shift will impact the R&D Tax Credit scheme. 

Baring some extraordinary evasive action, Britain will leave the EU on January 1st. Its impact on British businesses will be immense.

While the Coronavirus continues to wreak untold havoc on our economy, we cannot forget about Brexit. But with less than four months to go, there is still huge uncertainty about our future relationship with Europe, and what that will mean for our economy. 

Thankfully, we do have some visibility on some things, like how Brexit will affect an essential lifeline for thousands of UK businesses: the R&D Tax Credit scheme. 

Based on everything we’ve heard from the government, the news is good. R&D Tax Credits should survive this seismic change unscathed. 

What are R&D Tax Credits?

 

The R&D Tax Credit, also known as R&D Tax Relief, is a government scheme which lets companies claim back up to 33% of their development costs, either as a tax reduction or a cash lump sum. 

In 2018 alone – the last year we have official figures for – HMRC paid out £3.5 billion worth of R&D Tax Credits to roughly 40,000 companies; an average of £87,000 per company

The scheme encourages innovation by making R&D less expensive and, therefore, less risky. It works, too. Government research has shown that every £1 of R&D Tax Relief stimulates between £1.53 and £2.35 in further R&D investment. 

But R&D Tax Relief doesn’t just support innovation; it acts as a vital, financial lifeline for businesses. Particularly SMEs, the main beneficiaries of the scheme, 80% of which are seeing revenues declining on account of the pandemic.

Interested in R&D Tax Credits for your business? Check out our step-by-step guide to claiming tax credits yourself.  

Will R&D Tax Credits be Stopped After Brexit? 

R&D Tax Credits play a crucial role in stimulating innovation and supporting businesses. Which makes this question all the more important: What will happen to the scheme after Brexit? 

From what we understand, the UK government has no plans to scrap or shrink R&D Tax Relief once we leave the EU. Or to change how the scheme functions in any meaningful way.  

The government has made it clear that ensuring Britain remains competitive, and increasing nationwide investment in R&D to 2.4% of GDP, are two of its top post-Brexit priorities. By creating an attractive environment for entrepreneurs, and incentivising investment, R&D Tax Credits will support both aims. 

When it comes to our future relationship with the EU, various scenarios are possible. We could leave with a mutually-beneficial deal or crash out without a deal entirely. But in every eventuality, we are confident the R&D Tax Credit scheme will continue.  

Interestingly, there is some speculation that the government will expand the R&D Tax Credits scheme after Brexit. To understand this thinking, we need to dig a little deeper into how R&D Tax Relief works, and how it interacts with EU law.  

EU and Your Tax Credits 

R&D Tax Relief is made up of two parallel schemes: SME R&D Tax Relief, which generally supports small-to-medium-sized businesses, and the Research and Development Expenditure Credit, otherwise known as RDEC.

The SME scheme is classified as ‘Notified State Aid’; a form of public financial assistance that is approved and regulated by the European Commission, in line with state aid rules. These rules allow the EC to limit how much financial aid each country gives domestic businesses, ensuring a level playing field across the union.

In addition to limiting the generosity of government schemes, state aid rules prevent companies from receiving multiple forms of notified state aid for the same development work. So, if a company wins an Innovate UK grant for cybersecurity software it’s designing, it cannot claim SME R&D Tax Relief for development work on the software as well. 

To be clear – if you receive grant funding, or any other kinds of notified state aid, you can still apply for R&D Tax Credits. Rather than applying for SME R&D Tax Relief, you must apply through the RDEC scheme, which is not classified as notified state aid but will only reimburse you 13% of your qualifying expenditure. 

Could the government expand the R&D Tax Credits scheme?

Once the UK leaves the EU, we will no longer be bound by its rules on state aid. 

This means, in theory, the government could significantly increase the amount of R&D Tax Relief companies can receive. The government could also allow companies to claim grants, R&D Tax Credits, SEIS funding, and other subsidies, all for the same projects. 

Will this happen? It’s possible. 

The government has committed to keeping Britain competitive. A more generous R&D Tax Credit scheme would support this objective.

Ramping up R&D Tax Credits would also serve as a targeted economic stimulus package – fuelling innovation and creating jobs – which the British economy may well need come the new year. 

However, a state aid free-for-all is unlikely. 

Trade-Off

The EU has made it clear that it will not allow the UK government to undercut European competitiveness through over-subsidisation. In fact, in any deal that would allow the UK access to the European market, the EU would seek to “ensure the application of Union state aid rules to and in the United Kingdom”. 

In effect, this would mean that SME R&D Tax Relief would still be regulated by Brussels, even though we will no longer be part of the EU. UK negotiator David Frost has called this position “unrealistic”. 

Meanwhile, the UK government is proposing to create its own regulations around subsidies, based on the WTO’s Agreement on Subsidies and Countervailing Measures. It has also committed to alerting the EU every two years on changes to these regulations. The EU has rebuffed this idea, saying it cannot be part of any free trade agreement. 

According to the Financial Times, legal experts have said that both sides will have to “agree to parallel subsidy regimes, which respect each other’s judicial sovereignty but rely on a mutually agreed set of parameters and principles set out in the UK-EU agreement.” 

In other words, UK state aid would need to be capped for a trade deal to be possible. 

Clearly, the trade negotiations have a long way to go. We will be updating this blog with all the latest information.

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Conclusion

R&D Tax Relief is a crucial part of Britain’s innovation ecosystem, encouraging innovation and helping businesses to extend their cash runway. 

Thankfully, it does not look like Brexit will affect R&D Tax Credits, and we are confident that the scheme will continue as usual in the medium term. 

The government may increase R&D Tax Relief once we are free from EU regulations on state aid. But with a long way to go in the UK-EU trade negotiations – and staunch posturing on both sides of the channel – we’ll have to wait and see. 

Get in Touch 

If you have any questions about R&D Tax Credits, or are interested in filing, then drop us a line. One of our tax credits experts would be happy to help. 

If you need cash soon, check out GrantTree’s Advance Funding service. We could advance you 80% of your R&D Tax Credit claim up to three months before you file.

If you are curious about R&D Tax Credits, Innovation Grants and Open Culture

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Dr. Christopher Brown
ABOUT THIS AUTHOR
Dr. Christopher Brown

Dr. Christopher Brown is one of GrantTree's leading R&D Tax Credits experts. A scientist, and an accredited accountant, Dr. Brown uses his plentiful expertise to help innovative companies claim tax rebates for their R&D work.







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