By having a look at the past relationship between the EU and the UK’s R&D Tax Credits scheme we can try to predict what will happen to the scheme post-Brexit.
It’s worth bearing in mind here that R&D Tax Credits consist of two schemes running in parallel: one is the Research and Development Credit (RDEC), also known as the Large Companies scheme, and the other is the SME scheme, which is more advantageous of the two.
The SME scheme is currently regulated by the EU, through what is known as State Aid legislation.
State Aid legislation caps incentives available in each EU member state so that no one state has an unfair advantage by subsidising more R&D than an agreed amount. Other schemes such as the SEIS and funding from Innovate UK are also classified by the EU as notified State Aid. If a company has received a grant it may reduce the value of a future R&D tax credit. Some grants are not currently classified as notifiable State Aid – speak to one of our specialists now if you need advice.
It is logical to ask whether these restrictions will remain in post Brexit-Britain. At some point, new regulatory legislation will have to be drawn up but significantly the UK government will no longer be bound by the EU laws on how it allocates R&D tax relief to the SME scheme.
Technically, in the future companies could be allowed to claim Tax Credits on expenditure for which a grant has also been awarded. We may see that much of the complexity between grants and R&D tax credits disappears. But for now a firm should get specialist advice to weigh up impact of grant funding on a future R&D tax credit claim.
Teresa May’s post-Brexit government has recognised the importance of R&D funding in their role to stimulate innovation. 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 stimulates the economy so it is likely they will want to see this continue.
The Government’s message is clear “Britain is open for business” and the key to attracting companies to the UK will be combination of competitive tax rates and other incentives such as R&D Tax Relief.
We won’t know for certain what any of the tax schemes will be until the Autumn Budget, but our prediction is that R&D tax credit funding will remain healthy and that it is probable that any future changes to the scheme will be more generous than in previous years.