The R&D Tax Credit allows UK companies to take risks in regards to developing new products, since it can be claimed even if the project outcome is unsuccessful. It could be argued that such a program is required to encourage innovation in science and technology in Britain.
There are currently two forms of R&D tax relief. RDEC (Research and Development Credit), which was formerly known as the Large Companies Scheme, is targeted at major corporations. The other is the SME scheme, which is a more lucrative option but comes with more restrictions. The EU operates the SME scheme under State Aid rules, and our discussion will focus on this scheme.
To qualify for SME R&D relief, your business must employ less than 500 staff and have an annual turnover of less than £75 million. Along with other benefits, qualifying SMEs can deduct 130% of their qualifying costs from yearly profit, in addition to the standard 100% deduction, giving them a total 230% deduction on their R&D-related expenses.
It is too early in the Brexit process to tell for sure how the SME R&D tax credits will change. However, the government has already given several past signs that it is increasingly supportive of science and technology innovation. This has included the lift of the cap on payable tax credits in 2012, as well as ongoing increases in both enhancement rates and surrender rates. It’s also reassuring that Theresa May has recognised the importance of innovation, and aims to make Britain the “go-to place for scientists, innovators, and tech inventors.”
A possible upside for the R&D credits in a post-Brexit world is that the UK will no longer be beholden to the EU’s State Aid legislation, which caps the amount of funding available to each member state to prevent any one country receiving an unfair advantage. With the UK no longer bound by this restriction, the government will be free to put as many incentives into a new tax scheme as they wish.
Brexit has undoubtedly shaken up the business and tax landscape in the UK. However, the government also has a great incentive to attract international businesses, as well as help create new domestic ones, through the use of competitive tax rates and other incentives. Key industries such as aerospace, engineering, pharmaceuticals, and software all rely heavily on R&D, and the British government has a strong incentive to keep such companies in the country. For this reason, it’s unlikely we will see a significant decrease in R&D credits for the foreseeable future.
KJG is committed to staying at the forefront of the changing and complex R&D tax credit rules as we enter 2018, and will work with our clients to find the best solution to fit their individual needs.