What effect will Brexit have on R&D Relief
The continuing negotiations between the UK and the EU as they attempt to reach some agreement about the future relationship served to highlight the extent to which the UK had become an integral part of the EU single market. Inevitably this leads to uncertainty within business about what this new relationship will look like and what changes will be necessary at both company and national level. Much is being made of the issues around free movement of goods and people but what of some of the more specific provisions of EU legislation which the UK also shares?
One such provision relates to the UKs R&D Tax Credit scheme which, whilst set out in the Corporation Tax Act 2009 and subsequently modified by Finance Acts of 2013 & 2016, is closely linked to EU regulations on State Notified Aid. These cap the aid that each EU member state can offer to businesses. Thereby ensuring that no individual EU member state can derive an unfair advantage by subsiding R&D more than allowed by the State Aid regulations. The regime for SME R&D Tax Relief is a State Notified Aid subject to these EU regulations.
It would seem to follow, therefore, that once the UK has left the EU there may be an opportunity for the government to reformulate the R&D tax relief regime. Although the extent to which this is possible is likely to be heavily dependent on whether the UK leaves with or without a deal. Any UK – EU deal may still restrict the Government to ensure fair competition. And we know that the EU is not in favour of the UK drafting its own regulations based on the WTOs Agreement on Subsidies and Countervailing Measures. Nor, it was reported in December 2021, is the EU comfortable with the UK providing state aid free from the constraints imposed by the EU.
The consequence of this is that new regulatory legislation will need to be formulated around state aid, but more importantly, it is not yet clear to what extent the government will be constrained on how it must allocate R&D tax relief to the SME Scheme either by EU laws or the terms of the trade agreement. This has a knock-on impact on the RDEC scheme which is generally maintained broadly in proportion to the SME scheme.
Independent of the specifics of the regime for providing relied for eligible R&D activities the Government has repeatedly stated that Britain is ‘open for business’. Supporting this the government published the Research & Development Road Map in July 2020, building on the Industrial Strategy Report from November 2017. In this the government sets out a clear goal to increase UK investment in R&D to 2.4% of GDP by 2027 and to increase public funding for R&D to £22 billion per year by 2024/25. This demonstrates that the government recognises the importance of supporting innovation and R&D through grants and subsidies.
A recent HMRC working paper, “Evaluation of the Research and Development Expenditure Credit (RDEC)”, published in October 2020, and drawing on academic research into how providing tax relief can stimulate expenditure, suggests that every £1 of tax relief given generates an additional £2.40 – £2.70 of R&D expenditure. The estimated cost of R&D Relief, both RDEC and SME schemes, for 2018-19 was £5.3bn, corresponding to £35.3bn of R&D expenditure
In the context of growing the UK economy having the right strategy on corporate taxation and incentives for investment will be critical both in encouraging growth in UK business and attracting inward investment from overseas. It would seem likely therefore, in the wake of both Covid-19 and the uncertainty surrounding Brexit, that the UK government would want to continue to support growth in UK companies through continuing to offer relief on research and development activities.