Brexit and R&D Tax: What’s the impact for UK Businesses?

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Expert Opinion
February 25, 2019

Britain’s decision to leave the European Union sent shockwaves through the UK economy and has ushered in a period of intense uncertainty which doesn’t look like it will be resolved anytime soon.

At the time of publication, with little over a month until the 29 March 2019, we still do not have a final withdrawal agreement in place and it is unclear whether the process will need to be extended to avoid a chaotic hard Brexit. And until Britain’s new relationship with the EU is finally defined and new trade deals negotiated, many UK-based businesses are starting to enact their plans to mitigate the effects of a no-deal Brexit. This is especially relevant for businesses that benefit from the UK’s R&D incentive schemes.

The UK’s R&D incentive schemes have always been intended to spur innovation in the UK and encourage increased spending on R&D activities, especially investment in high value STEM jobs. R&D incentives have been adopted by most major economies, and they demonstrate that the country in question is an attractive place to invest and do business, especially important for the UK post-Brexit.

UK R&D incentives are available to companies of all sizes providing that they are investing in qualifying project activities, are a going concern and are subject to Corporation Tax. Essentially, they offer businesses reductions in payable corporation tax or even payable cash credits, and they based on costs incurred whilst developing new, or improving existing products, services or processes.

What does Brexit mean for R&D tax right now?

Even with the current uncertainty, Brexit does not have an immediate impact on the R&D incentive schemes.

It’s the UK Government providing the funds for the R&D tax schemes, so this will not be affected by the decision to leave the EU. R&D incentives should be used to signal to the world that the UK remains a key centre for innovation.

In fact, the RDEC rate was increased to 12% in 2018, which demonstrates that the government is committed to encouraging businesses to remain in the UK and that we are open for business.

What will the impact of Brexit be longer-term?

At the moment it is difficult to say with any certainty what the longer term impact of Brexit will be and it will depend on the future relationship we have with the EU. If Brexit goes ahead as scheduled, then at this point the UK’s R&D tax schemes will no longer be bound by EU regulations.

One element that may be affected by this change is the impact of the EU’s State Aid regulation on UK R&D tax.  Businesses that receive other aid supporting innovation have to reduce the value of their R&D tax claims because of EU State Aid regulation.

In a post-Brexit world, the Government will be able to determine exactly how it wants its R&D tax schemes to be structured, with no restrictions from Europe.  This could well result in more generous R&D tax schemes.

Innovation is critical to the future success of the UK, regardless of the outcome of Brexit. It is an important element of ensuring that we raise productivity and living standards. Now more than ever, we will need to be ensuring that the UK remains an attractive place to invest in innovation.  Even though the UK’s schemes are currently less generous than elsewhere in Europe, France for example, Ayming’s R&D Benchmark shows that the UK’s ease of application mean businesses should be reassured that the outlook for R&D tax relief in the UK is a positive one.