How will Brexit affect R&D tax credits?

19th Jul 2019
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Although Brexit continues to bring with it a large amount of uncertainty, there are still things businesses large and small can be doing to save some money that could help mitigate its effects. Cutting production costs where possible, making efficiencies and completing a thorough audit of where and how your company’s money is spent is critical. Additionally, it’s well worth making sure that you are aware of - and have applied for - any tax reliefs or financial help that you may be eligible for (R&D tax credits and R&D grants are two good examples of this).

What are R&D tax credits?

If your company endeavours to carry out any research and/or development activities then you could get R&D tax credits, which can cut down your tax liability or increase taxable losses.

R&D tax credits are administered by the government and act as a tax incentive designed to encourage businesses to expand, invest and innovate. They allow your company to claim back a percentage of its expenditure on R&D as tax credits, or to receive the relevant equivalent as a lump sum which is to be put into research and development projects.

Will R&D tax credits be stopped after Brexit?

In the years since the referendum result, many companies have spent time wondering what effect the untangling of the UK from EU legislation will have on the country’s economy, and indeed on their own balance sheets. For example, will the current R&D tax credit scheme continue to exist, either in its current form or as something else, or will it be cut out altogether?

Firstly it’s important to remember that some kind of change is likely to come about over the course of the Brexit negotiations. The R&D scheme which has had the biggest impact on smaller innovative companies, even though many SMEs are still not claiming thier full entitlement - is called the SME Scheme - and is in fact currently under the regulation of the EU via State Aid legislation. The idea behind this is that it caps the incentives that each EU member state can avail of,  meaning that no one state gains an unfair advantage by subsiding R&D over and above the agreed amount. The upshot of this is that at some stage, new regulatory legislation will need to be formulated, but more importantly, the government will not be bound any longer by EU laws on how it must allocate R&D tax relief to the SME Scheme.

The second point to bear in mind is that the government has already communicated its recognition of the importance in supporting innovation through R&D grants and has strongly hinted that the money hose will not be running dry any time soon. Indeed, government studies have highlighted that every £1 of R&D tax relief leads to anything from £1.53 to £2.35 in expenditure, which in turn has a very positive effect on the economy. Of course, this kind of expenditure is not something the government would want to damage.

Finally, it has been made clear many times by Parliament that Britain is ‘open for business’. With all countries effectively looking to compete against one another in attracting business to their shores, the success of enticing companies to the UK essentially involves competitive tax rates, particularly for the most influential performers in R&D, such as pharmaceuticals, engineering, software and aerospace.

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