What will be the impact of Brexit on R&D tax relief? This is a question we are being asked regularly by accountants and clients.
At this stage nothing has been announced and we suspect the Government will have plenty of other things to focus on before looking at making changes to R&D tax; however with recession looming both here and in Europe which is our biggest export market, it is fair to say some additional stimulus to make UK businesses more competitive would be welcome.
R&D tax relief is not funded from Europe. It is based on UK tax legislation and so Brexit will not cut off the source of funding.
In fact, Brexit might actually help the UK Government increase the level of R&D tax relief that is offered. While we're part of the EU we have agreed not to use 'state aid' to give UK businesses an unfair advantage over others in the common market. By leaving the EU we are no longer bound by those restrictions. In theory therefore, we could see the UK increase the level of funding available to both large and small companies through the R&D tax regime. This could be by increasing the uplift available or by allowing grant-funded SMEs to make claims under the normal SME regime (rather than RDEC claims at the lower level currently allowed).
That said, it is likely that to be able to agree favourable trading terms with the EU (such as not having import levies charged when people in the EU buy British products or services) we'll have to agree not to blow the state aid limits (for instance).
At the time of writing we've had the referendum but no binding action has taken place. If and when the Government begins the process of disentangling the UK from the EU it will be 2 years before that takes place. At this stage any thought on how this might pan out is pure speculation and our best guess is that it will be business as usual for the next few years.
George Osborne has said that he intends to lower corporation tax to 15% in the years ahead to make the UK a more appealing place for businesses to locate. Under the SME R&D regime the benefit it given as a tax saving, so reducing the tax rate will reduce the net benefit of claims; however for companies claiming RDEC (large companies and SMEs doing grant funded work / work sub-contracted to them by large companies) will see an increase in net benefit. In most cases the difference will be small and won't be felt until a year or so after the rate change takes effect (i.e. when claims covering costs in that period are submitted).
Companies typically carry out R&D to make future profits and so on the whole reducing tax on profits should be welcomed even if it slightly adversely affects R&D claims.
As always, our biggest concern is helping more businesses access this tax relief as the take-up rate is a poor reflection of the level of innovation going on in British business. If you'd like to understand how this will impact your business please get in touch.