How Brexit affects the R&D Tax Credits scheme

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Whilst the Brexit vote has temporarily rattled the UK’s tech industry, the dust is now settling and we begin to look to the future to figure out what form post-Brexit may take. Here we explore the past and future relationship between the EU and the UK’s R&D Tax Credits scheme.

What does the EU have to do with R&D Tax Credits? 

A peculiar aspect of R&D tax relief is that there are two different schemes running in parallel: one is the RDEC (Research and Development Credit), formerly known as the Large Companies Scheme, and the other is the SME scheme, which is far more lucrative than the RDEC scheme. The EU regulates the SME scheme, which operates under what is known as the State Aid rules.

State Aid regulations are imposed on national governments to ensure fairness in competition for companies across the EU, and financial support as generous as the one provided by the SME scheme requires approval from the European Commission in a process known as ‘notifying’ the State Aid.Other schemes such as the SEIS and funding from Innovate UK also fall within notified State Aid. In short, these regulations define the characteristic requirements of a SME and prevent projects from receiving financial assistance from multiple sources in an unfairly advantageous manner. This is the reason why the interaction between grants and R&D Tax Credits can be complicated if you are claiming R&D Tax Credits yourself and why it is important to ascertain whether the grants fall within State Aid or other rules pertaining to subsidised expenditure. However, receiving a grant does not prevent a company from being eligible for R&D Tax Credits. As previously mentioned, R&D Tax Credits consist of two schemes; while the SME scheme is subject to State Aid rules, a company who has received a State Aid grant would still be eligible for the RDEC scheme.

Would we lose R&D Tax Credits when we Brexit? 

Honestly, it’s not possible to say with absolute certainty how the R&D tax relief will change. In the past decade, the government has demonstrated that it is supportive of innovation and its determination is reflected in its increasingly generous R&D tax relief schemes. We have already seen the lift of the cap on payable tax credits in April 2012 when companies began receiving more than they paid into HMRC (prior to April 2012, the amount payable was restricted by the company’s corporation tax and PAYE contributions), and the incremental increases of the enhancement rates (from 150% before 2008, to 175% in 2011, to 200% in 2012 and the current 230%) and the surrender rates (from 11% in 2012 to the current 14.5%).

Philip Hammond, the new Chancellor, has confirmed that there would be no emergency budget on 14 July, and he has hinted that there may be a spending surge to counter Brexit shock. We won’t know for certain whether corporate tax will be cut to 15% or what any of the tax schemes will be until the Autumn Statement, but it is unlikely that the R&D tax relief schemes would be scrapped and if the Chancellor’s statement holds true, then it is probable that changes to the schemes will be more generous than previous years.

Could Brexit lead to a greater amount of R&D Tax Credits available under new domestic rules?

Here’s a thought experiment with the UK outside of the EU: could Brexit lead to a greater amount of R&D Tax Credits available because the schemes are no longer subject to EU regulations?

Yes it could. The EU imposes regulations on the SME scheme to ensure a level playing field for European businesses by restraining the subsidies national governments can provide.This is called “State Aid” regulation. So it is technically possible that once the UK is outside of the EU, the UK will be free to offer companies all the money it wishes. For example, it could technically allow companies to claim Tax Credits on expenditure for which a grant has also been awarded.

However, we don’t think that will be the case because there are many other areas where there’s been clear interest in removing EU red tape (e.g. VAT), and State Aid regulations would likely be of very low priority to the Brexit government. Furthermore, removal of the EU State Aid regulations without replacing it with similar regulations would likely lead to abuse of the schemes. So far, these EU regulations have been effective in preventing the unfair advantage of “double dipping”, and if the UK were to remove the EU red tape, it is probable that similar domestic regulations would need to be put in place in the hopes that they could achieve the same result. So there’s little incentive for the government to make that a priority in the first few post-Brexit years.

What can we do in this uncertainty? 

Whilst we’re trying to be optimistic about Brexit, there is little doubt that London has been shaken by the outcome of the referendum. We have heard stories of investors pulling out of funding rounds and companies putting recruitment efforts on hold. A lot of the detail about the next steps is up in the air, so for now it is a waiting game until we see which way the wind is blowing for Britain’s tech hub future.

In this Brexit tumult, uncertainty around money and funding rounds has become increasingly prevalent. GrantTree’s Advance Funding product allows us to cash advance you up to 50% (up to £25k) of your claim value within 48 hours of filing; you then receive the remainder when HMRC verifies the claim, which typically takes about 5 weeks. For more information on Advance Funding or for a general chat about how to go about claiming R&D Tax Credits or grants, please get in touch.

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GrantTree  @GrantTree,Nov 28
Puzzled about the R&D Tax Credits and Grants relationship? Need insight about how to successfully access both? https://t.co/JVDoxT6zam 
GrantTree  @GrantTree,Nov 24
We unpick what yesterday's Autumn Statement means for the future of R&D in Britain and how it impacts your business. https://t.co/2XP90BmL4Q 
GrantTree  @GrantTree,Nov 23
RT @Payah:good news for @GrantTree friends and clients! https://t.co/8lAbYYUcaG 
GrantTree  @GrantTree,Nov 07
The age old question (well in R&D Tax Credits anyway!): should you file with your accountant or a specialist? https://t.co/HEChpmvvNM 
GrantTree  @GrantTree,Nov 03
RT @BizAdvice_UK:Find out which tax credits and reliefs you are eligible for as an #entrepreneur. https://t.co/Z141n2icPq https://t.co/zkO6TS2W5Q