Now that the country has had some time to dust itself off from a Brexit vote outcome that took many by surprise, UK technology companies are wondering how the economy and their own balance sheets will be affected as the UK untangles itself from EU legislation, for better or for worse.
So how will Brexit will affect the UK’s current R&D tax credit incentive scheme? The first thing to keep in mind is that some form of change is likely to unfold through the course of the Brexit negotiations. The R&D scheme that has the most impact smaller innovative companies – the SME Scheme, is actually currently regulated by the EU, through State Aid legislation. The purpose of this is to cap the incentives available in each EU member state so that no one state has an unfair advantage by subsiding R&D more than an agreed amount. This means that at some point, new regulatory legislation will have to be drawn up but more importantly and the government will no longer be bound by the EU laws on how it allocates R&D tax relief to the SME Scheme.
The second thing to keep in mind is that Theresa May’s post-Brexit government has recognised the importance of stimulating innovation through R&D grants and has indicated that it will have ‘deep pockets’ when allocating funds to this end. The government’s own studies have shown that every £1 of R&D tax relief leads to between £1.53 and £2.35 in expenditure, which has a great stimulating effect on the economy – this is something that the government will very likely want to see continue.
Finally, the government has said that Britain is ‘open for business’. As all countries are effectively competing to attract business to their shores, the key to luring companies to the UK will be a combination of competitive tax rates, and other incentives, particularly for the businesses that are key R&D performers, such as software, engineering, aerospace and pharmaceuticals.
It is also worth keeping in mind the post-Brexit government’s stance on corporation tax. In November’s Autumn Statement, the Chancellor of the Exchequer, Phillip Hammond, emphasised the government’s determination to cut corporation tax to 17% by 2020, the lowest rate of all the G20 countries. This assumes that Article 50 negotiations end in an agreement with the EU rather than the UK reverting to WTO rules, which would likely see a ‘slash and burn’ approach to corporation tax, setting it at a rate that much lower than EU states are legally able to match.
While this normally would mean that R&D tax claim values will be reduced as corporation tax falls, given the need for the UK to be competitive in a post-Brexit world, we will see the headline R&D benefit figure increase.
Our takeaway from all the above points is that whilst Brexit has created an environment of economic uncertainty for innovative companies, we can predict with a fair amount of confidence that on the whole, the R&D tax credit funding system will remain healthy and we are not likely to see any significant reduction in the foreseeable future.