August 31st, 2018
What Will R&D Tax Relief Look Like After Brexit?
R&D relief and tax credits are a valuable source of government funding for many tech companies. For those qualifying under the Small & Medium Enterprises (SME) scheme, the benefit can range from 19% to 34% of the qualifying R&D spend.
Organisations that don’t qualify for the SME scheme can obtain relief via the R&D Expenditure Credit (RDEC), albeit at a reduced rate of 10% of their R&D spend.
You can read up on the finer points of R&D relief, including how it works, in our previous blog.
What impact does the EU have on the UK’s R&D relief policy?
Fundamentally, this is an issue of regulating competition between member states of the EU, in particular in the field of state aid.
If too much state aid is afforded to companies in a particular country then an unfair advantage is created over companies in other countries in which the state aid is not quite so generous. As such, the EU imposes strict limits on how much state aid can be provided by countries to companies located within their borders.
Now, the SME R&D scheme operated by the UK government is so generous that it is considered state aid by the EU. This means that the current benefit enjoyed by UK tech companies can’t go any higher without the other EU member states agreeing.
This is why the receipt of grants can restrict access to the SME scheme for companies that would normally be comfortably within the SME limits.
What happens to our state aid rules when we leave the EU?
The UK leaves the EU on 29 March 2019 and enters into a transitional period that runs to 31 December 2020.
During this transitional period, the UK will continue to apply the EU state aid rules with the EU retaining the responsibility for approving and monitoring the aid.
What happens after the transitional period ends will ultimately depend on what is contained within the final deal struck between the UK and the EU. The Conservative government, however, has already made a clear commitment to maintaining harmony between any future UK state aid framework and that of the EU.
Another complicating factor is the uncertain political landscape in the UK. The next general election is scheduled for May 2022 but a snap election shouldn’t be ruled out if negotiations with the EU don’t go to plan. Hands up those who think negotiations are currently going well?
The Labour party has already announced that it would abandon restrictions on state aid, which would open up more opportunities to support, in the party’s words, “cutting edge industries”. Sounds a lot like R&D to me.
What could change in R&D tax relief?
If state aid rules are relaxed, or scrapped entirely, there are various areas in which the government can seek to increase R&D relief:
- Increase the enhancement rate, currently 130%
- Increase the repayable tax credit rate, currently 14.5%
- Increase RDEC, currently 12%
- Widen the definition of qualifying expenditure
- Revamp R&D Allowances on capital expenditure, for example buildings used for R&D activity. Perhaps bringing in an element of enhancement would encourage foreign companies to establish permanent R&D bases in the UK
- Allow SMEs in receipt of grants or investment from large R&D partners to continue to use the SME R&D scheme
The areas most likely to attract government attention, in my view, would be items (2) and (5) as they would allow fledgling tech businesses access to better funding in the early years of development when income may not be being earned.
As it stands, however, R&D relief looks like it will stay broadly as it is until at least the next general election. As the famous phrase goes, a week is a long time in politics so who knows what the position will be by the end of this year never mind after the end of the transitional period or three years from now.
