18TH JULY, 2019

How Will Brexit Affect R&D Tax Credits?

Although Brexit continues to bring with it a large amount of uncertainty, there are still things businesses large and small can be doing to save some money that could help mitigate its effects. Cutting production costs where possible, making efficiencies and completing a thorough audit of where and how your company’s money is spent is critical. Additionally, it’s well worth making sure that you are aware of - and have applied for - any tax reliefs or financial help that you may be eligible for (R&D tax credits and R&D grants are two good examples of this).

What are R&D tax credits?

If your company endeavours to carry out any research and/or development activities then you could get R&D tax credits, which can cut down your tax liability or increase taxable losses.

R&D tax credits are administered by the government and act as a tax incentive designed to encourage businesses to expand, invest and innovate. They allow your company to claim back a percentage of its expenditure on R&D as tax credits, or to receive the relevant equivalent as a lump sum which is to be put into research and development projects.

Will R&D tax credits be stopped after Brexit?

In the years since the referendum result, many companies have spent time wondering what effect the untangling of the UK from EU legislation will have on the country’s economy, and indeed on their own balance sheets. For example, will the current R&D tax credit scheme continue to exist, either in its current form or as something else, or will it be cut out altogether?

Firstly it’s important to remember that some kind of change is likely to come about over the course of the Brexit negotiations. The R&D scheme which has had the biggest impact on smaller innovative companies, even though many SMEs are still not claiming thier full entitlement - is called the SME Scheme - and is in fact currently under the regulation of the EU via State Aid legislation. The idea behind this is that it caps the incentives that each EU member state can avail of,  meaning that no one state gains an unfair advantage by subsiding R&D over and above the agreed amount. The upshot of this is that at some stage, new regulatory legislation will need to be formulated, but more importantly, the government will not be bound any longer by EU laws on how it must allocate R&D tax relief to the SME Scheme.

The second point to bear in mind is that the government has already communicated its recognition of the importance in supporting innovation through R&D grants and has strongly hinted that the money hose will not be running dry any time soon. Indeed, government studies have highlighted that every £1 of R&D tax relief leads to anything from £1.53 to £2.35 in expenditure, which in turn has a very positive effect on the economy. Of course, this kind of expenditure is not something the government would want to damage.

Finally, it has been made clear many times by Parliament that Britain is ‘open for business’. With all countries effectively looking to compete against one another in attracting business to their shores, the success of enticing companies to the UK essentially involves competitive tax rates, particularly for the most influential performers in R&D, such as pharmaceuticals, engineering, software and aerospace.

Corporation tax is another big player post-Brexit. In the Autumn Statement of November 2018, Phillip Hammond, Chancellor of the Exchequer, emphatically outlined the government’s insistence that corporation tax should be cut to 17% by the year 2020. This would then make it the lowest amongst all of the G20 countries. However, it does assume that we don’t ‘crash out’ of the EU on WTO terms, but instead manage to agree on some kind of EU deal. In exiting without a deal, the Chancellor is likely to have to slash corporation tax to a rate that the EU states could not legally match, in order that the UK remains competitive. Whilst this would ordinarily mean that R&D tax claim values are reduced as corporation tax falls, the headline R&D benefit figure would increase, again due to the need for the UK to compete in a post-Brexit world.

The takeaway conclusion from the issues we’ve looked at here is that although Brexit has given rise to a certain amount of economic uncertainty, we can fairly accurately predict that by enlarge the R&D tax credit funding system is going nowhere. The likelihood is that it will remain healthy without any significant cuts in the foreseeable future.

What are R&D grants and how can they help?

A research and development (R&D) grant can be vital for companies that are looking to offer a new service or process, or to develop an innovative new product. Where R&D tax credits offer either money off a company’s tax bill or as a specific cash amount to put towards an innovation project, a grant is a lump sum unrelated to tax that can cover the whole (or at least part) of a project and unlike a loan, is not paid back. These grants can come from local and regional bodies or other organisations wishing to back research and development activities.

To receive funding, a business needs to demonstrate how it will benefit from an R&D grant and what it will use the money for. A business also needs to understand the application process, and what its chances are of success. Myriad Associates, the parent company of Tax Cloud, have an entire division of grant bid writing experts in this field and would be pleased to advise you at any point along the way.

Simply click here to speak to one of our grant bid writing experts.

How can Tax Cloud help?

Designed for both businesses and accountants, Tax Cloud is an online portal that offers companies cost-effective, expert guidance through the process of claiming R&D tax credits. Not only it is straightforward, quick to use and more affordable than traditional consultancy, it could save you a lot of time by giving your business the very best chance of being accepted.

Call us today on 0207 118 6045 or use our contact page and we’ll be happy to assist you in any way we can.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Myriad are the creators of Tax Cloud, we help enterprises navigate, apply and secure tax incentives and grants. We specialise in R&D Tax Credits, Creative Tax Reliefs, Innovate UK grants, Horizon Europe grants, and R&D Capital Allowance Claims.

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Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate