Brexit has becoming synonymous with the word uncertainty. Indeed, the events of the previous week that have blown the plan to deliver Brexit by the 31 October out of the water have perfectly encapsulated this sentiment. Parliamentary debates about backstops and no deals and everything in-between have left all involved and spectating confused and exasperated. Unfortunately, this blog will not shine an illuminating light on these matters, it will only serve to highlight another important uncertainty that has missed the headlines, research and development.
INNOVATION IS KEY
Innovation is such an important growth factor within the global economy, and this is seen in the generous tax reliefs given to companies that perform research and development activities by governments. Innovation is also the mortal enemy of uncertainty as businesses are required to make significant investments. When those same businesses could stand to lose their free trade status with some of their key EU customers and suppliers, like UK firms currently face, they can be forgiven for being risk adverse.
HOPE IN THE FIGURES
However, the latest statistics from the Office and National Statistics (ONS) have confounded all expectations of a reluctance to innovate. UK spending on R&D rose in 2017 by £1.6 billion to £34.8 billion, placing it 11th in the EU leader board. Recent research has also shown that for every £1 spent on R&D an additional £2.55 is pumped back into the economy. This sunnier picture is also reflected in anecdotal evidence based my experiences with clients in the local area. My conversations with firms when preparing R&D claims have proven that businesses are keener to innovate now more than ever. Indeed, some of the projects I have encountered were truly remarkable and found in some of the most unexpected places. It has reinforced to me that the public understanding of R&D as a “lab coat” activity barely scratches the surface of what happens. My work this year has taken me to the offices of software developers, packaging manufacturer, chemical plants, iron mongers, ice cream parlours and even a plant nursery: all with unique and truly innovative ideas which qualify for R&D tax credits. The moral of the story is that businesses should consider R&D based on their activities as opposed to their industry.
HOW DOES BREXIT RELATE TO R&D?
Brexit is potentially pivotal to R&D in UK. The upside will be that the UK government would no longer be restricted to the stringent EU regulations limiting R&D relief. Under these rules R&D tax credits are considered a “state-aid” which are closely monitored by the EU to ensure an even playing field across all the member states is maintained. Upon leaving the EU, the UK would no longer be subject to these restrictions and would be entitled to relax both the relief cap and the qualifying criteria for making a claim. The UK government has already made its intentions clear with plans to raise R&D investment to 2.4% of GDP by 2027, which will be welcomed by SMEs across the country.
There is a potential downside. Although the UK has a great reputation for innovation, it is reliant on both foreign collaborators and attracting the best talent from across the globe. Brexit is expected to dissuade EU businesses and staff alike from considering the UK due to the impracticalities of the separation. The worst-case scenario is that these impracticalities are so severe that businesses (including UK based companies) will have to look elsewhere to launch their innovation operations. Asia offers a very attractive alternative as South Korea and China jostle to tempt businesses over with generous R&D incentives. This has already been seen with Dyson moving their operations out to Singapore.
However, the same logic can be used to illustrate a possible upside. It is widely expected that the value of sterling will plummet after Brexit. Although there are several concerns related to that, one benefit will be its relative cheapness compared to other currencies. This may make investment in the UK attractive to foreign companies despite the additional complications of Brexit.
All that can be certain is that nothing is certain.
EMPLOYERS ALLOWANCE AND R&D
This may only be applicable if Brexit is delayed after 6th April 2020 but, as noted above, nothing is certain. In any case, HMRC intend to make changes to the employer allowance scheme which will deny any “large” company (total employers NIC contributions of more than £100,000 in the previous tax year) the relief. This amendment to the rules means that the employers allowance scheme will fall foul of the aforementioned EU “state-aid” rules.
What this could mean is that any R&D claim made by a company which also was claiming the employers’ allowance would have to be made using the less generous RDEC scheme. In order to make the claim under the SME scheme, companies will need to stop claiming the employers’ allowance. Ultimately, directors will need to measure up whether difference in the two R&D reliefs outweighs the £3,000 employers’ allowance.
Brexit will undoubtedly cause issues for UK business, the extent of these is unknown. Attracting new talent and collaboration from abroad will be trickier, which could affect UK business’ ability to be innovative. However, despite all this there is still a big appetite for innovation by UK companies. The UK government and HMRC have new found freedom to continue this trend by stimulating R&D spending with more generous reliefs. How they use that power will determine the fate of UK innovation post Brexit.