R&D tax relief and Brexit

    R&D tax relief is arguably the most generous corporation tax relief currently available in the UK today. For SMEs, up to one-third of qualifying R&D costs can be recovered through the tax system. It’s therefore of little surprise that the bombshell of Brexit has left many SMEs nervous about the future of the R&D tax relief scheme. 

    Before we discuss the possible outcomes, let’s start with a blunt fact. At this moment in time, no one knows for certain how Brexit will impact on R&D tax relief. Despite the vote to leave having occurred nearly two years ago, the UK is still very much in the dark about how Brexit will look. R&D tax relief is just one of many thousands of legislative headaches which need to be resolved. 

    So how might Brexit impact R&D tax relief?

    Although R&D tax relief is solely funded from within the UK, the SME R&D tax relief scheme is classed as a notified state aid. These forms of state assistance are those which need to be notified to the European Commission as they are considered generous enough to have the potential to distort competition amongst member states. When the UK leaves the EU, it’s highly likely that it will no longer need to consider state aid rules, leaving the Treasury free to dictate the availability and generosity of the relief. 

    So if in future the Treasury was free to dictate its R&D tax rules, it’s worth examining recent policies where R&D tax relief is concerned, as this may give an indication of future policies that may be forthcoming in the post Brexit environment.  

    Pleasingly, the Treasury demonstrated a commitment to the R&D tax relief scheme as recently as the 2017 Autumn Statement. In this announcement, the Research & Development Expenditure Credit (RDEC – the scheme utilised by large enterprises and SMEs with grant funded projects) was increased from 11% to 12% for expenditure incurred on or after 1 January 2018. Although far from conclusive, it certainly provided an indicator that the Treasury is still committed to providing tax relief for R&D expenditure in the post Brexit vote environment. In his statement, the Chancellor also announced that £2.3bn of R&D funding would be made available for UK businesses. 

    So, in the future, assuming the Treasury would be free from the shackles of state aid regulations, the early indicators are that R&D tax relief would be a central component of the UK’s R&D policy. 

    Another potential impact as a result of the UK’s decision to leave the EU may be the harmonisation of the two R&D schemes which currently operate. The numerical mechanics of the less generous and non-state aid RDEC scheme are entirely different to those operating in the state aid governed SME scheme. It’s an odd situation – and one which adds little credence to the Office for Tax Simplification’s desire to make the UK tax system less complex. Once the UK is free from EU interference in its tax system, perhaps the two R&D schemes will be harmonised, meaning a similar system will be shared by both SMEs and large enterprises. 

    Such a move would also end the complexity when SMEs receive grant funding. Currently, where an SME receives certain types of grant funding, it is required to claim under the RDEC scheme. It may also have non funded projects which can be claimed under the SME scheme. This leads to a somewhat clumsy process of having two separate claims in a single tax return, which is often a source of confusion for the less experienced tax adviser. 

    Despite the possible outcomes identified above, the discussion regarding R&D tax relief and Brexit is pure conjecture at this moment in time. Like many other aspects of the UK’s regulatory outlook, R&D tax relief faces an uncertain future. The early indicators are positive – a commitment to R&D investment in the recent Autumn Statement and an increase in the RDEC rate on 1 January 2018. Drawing conclusions, however, would be unwise and in these ever uncertain times, we are guaranteed surprises. 

    Our specialist in-house R&D division can assist you with your clients’ R&D tax relief claims. For more information please contact a member of the team today by calling 0114 2364457 or emailing marketing@abbeytax.co.uk.