How will Brexit affect R&D Tax Credits? Part 1

Part 1: Introduction & General thoughts

Unsurprisingly this is something that I’m asked increasingly these days, and I should start this article by giving the short answer, which is that I’ve no idea! Given the complex nature of the current situation, it’s impossible to know anything with any certainty regardless of whether you are for or against exiting the EU. On the other hand, there are a few interesting elements that might affect R&D spending in general and R&D tax credits in particular that I thought I’d bring together here in this short series of articles.

General thoughts

It’s clear that Brexit is already having a significant effect on many, if not most UK businesses. At the very least, the shift in exchange rates is hitting many businesses, who are looking for new ways to cut costs and support cashflow. This is driving some companies to consider making R&D claims for the first time – something we’re certainly seeing at WOCO.

The R&D tax credit scheme is certainly a very generous tax relief, which does mean it comes up in discussions about tax reform, either in the press or from certain political parties. On the other hand, the government’s own analysis of the scheme showed measurable benefits to R&D investment and productivity, and both sides of the UK political spectrum were involved in introducing and enhancing the scheme.

As a result, we think it unlikely that any government would abolish the scheme, as to do so would send the message that they are not supporting innovation in the UK, which is not a message any politician wants to send, especially in the current environment. That is not to say that there won’t be some changes – in the past as the main rate of corporation tax has dropped, the R&D tax credit rates were increased to compensate. It is likely that in the current constrained times this will not happen as the main rate drops below 20%, resulting in an effective small reduction in the scheme. If the UK was to slash tax rates radically in the event of falling out of the EU with no agreement, it might be necessary to adjust the R&D rates as well to avoid too large a change in the scheme, however this seems unlikely given how politically sensitive asking corporations to pay less tax would be.

In the next article (click here) we’ll look at the impact on the two main R&D tax credit schemes available to UK companies.