What does Brexit mean for the future of RD by Linda Eziquiel

by Heather Dandridge  28-Jul-2016 at 17:08

What does Brexit mean for the future of R&D Tax Credits? by Linda Eziquiel

The initial shock waves from Britain voting to leave the EU are subsiding, however the longer term impacts are yet to be felt. The big question for those UK companies claiming R&D tax relief and tax credits is - What does Brexit mean for our R&D claims?

General opinion is that there will be no immediate impact. Over the longer term there could even be some positive outcomes, as the UK will no longer be bound by EU regulations that put restrictions on how R&D tax relief and tax credits are framed.

The UK government, like many other countries around the world, uses tax incentives, such as the tax reductions and cash credits available under the R&D schemes, to make the UK more attractive for companies. They see the R&D tax credit schemes as critical to underpinning UK economic growth and competitiveness by supporting investment in innovation across all industries and sectors. Their belief in the schemes is evidenced by the many recent improvements made - currently the benefits are greater than they have ever been.

It's worth mentioning at this point that there are two R&D tax credit schemes, the Small and Medium Enterprise (SME) scheme and the large company scheme as the implications of Brexit may differ for each one. The Large Company scheme is now called RDEC (Research and Development Credit) and is for companies with over 500 employees.

The SME R&D scheme is subject to European State Aid rules because it provides such generous subsidies. Companies receive tax reductions or tax credits worth between 18% and 33% of their eligible R&D costs, or even more if they would have been subject to taxation above the current small company corporation tax rate of 20%. For this reason the benefits under the SME R&D scheme are classified as Notified State Aid.

Under EU rules:
  • The UK has to consider EU restrictions and objections before implementing changes to the R&D schemes.
  • There are limits to how much Notified State Aid can be received by a company.
  • The same activity or project can only be funded by one sources of Notified State Aid.
The implication of this for SME companies that are seeking, or in receipt of grant funding, is that currently they need to consider which form of funding is best for them and ensure that they do not breach any EU rules. As well as reducing the scope for funding innovation using a mix of funding sources, this can lead to some quite complex scenarios that have to be correctly assessed and dealt with.

The RDEC benefits are not classified as Notified State Aid as they are far less generous, however if the UK government wanted to further improve the RDEC scheme they would have to consider the implication of the EU State Aid rules, so the scope for making changes is limited.

Theoretically once the UK is no longer part of the EU the government will have scope to allow companies to fund projects using a mix of R&D tax credits and government grants, as the EU State Aid rules would no longer apply. Plus the UK would not need EU agreement to increasing the benefits available under the R&D tax relief and tax credits schemes. However that will depend on what relationship we develop with Europe as such freedoms, given they would breach European Free Trade Association agreements, could come at a cost in other areas, such as tougher import and export custom duties for companies trading with the EU.

Overall it seems likely that the UK government will want to continue and possibly enhance the attractiveness of the UK as a place for doing business, supporting investment in innovation is a key plank of that. So in summary I feel it is unlikely that the UK R&D tax relief and tax credit schemes will be adversely impacted by Brexit and if the UK is prepared to breach existing EU regulations, they could even be significantly improved in the future.
 
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