How will Brexit affect R&D tax credits?

Brexit is dominating the news and has created a lot of uncertainty for all of us in the UK. In this politically neutral article, I’m going to explore how I think Brexit will affect R&D tax credits in the UK. 

The short answer is that I don’t think Brexit will make any difference at all.

For those unfamiliar with the R&D tax credits scheme, R&D tax credits are a UK Government scheme to encourage innovation in the UK. The scheme has been around since 2000 and has gotten more generous over the last few years. Currently, innovative UK businesses can claim back up to £33.33 cash of every £100 they spend on R&D costs. R&D claims can be in any industry, such as software, manufacturing, textiles, fintech, biotech and foodtech. A high proportion of startups are doing something innovative and are therefore eligible for R&D tax credits.

The UK government is restricted in how much cash it can give business through R&D tax credits by the EU’s State Aid rules. These restrictions stop any EU member from giving overly generous R&D tax credits. This theoretically prevents a “race to the top” and allows each EU member country to compete on a level playing field. These restrictions could stop on 1st January 2021, when the UK’s transition period is supposed to end.

When the transition period ends, the UK Government could have full sovereignty over the UK’s laws and could make the UK R&D tax credit rules more generous. This would give the UK a distinct advantage over France, Germany and other EU members as a place to do business. Additionally, the UK government could adjust R&D tax credit rules to achieve specific policy aims. For example, the R&D tax credit rates could double for companies in Healthtech who are designing products to help the NHS. 

However, making R&D tax credits more generous is very unlikely to happen as it would probably cause more harm to the UK overall. If the UK government changed R&D tax credit rules so that they were better than other EU countries, the EU would probably feel forced to take action through tariffs. European Commission President Ursula von der Leye is recently quoted as saying:

"Without a level playing field on environment, labour, taxation and state aid, you (the UK) cannot have the highest quality access to the world's largest single market". 

Given an EU-UK free trade deal is more valuable than generous R&D tax credit rules to the UK, we probably won’t be seeing any significant increases to R&D tax credit rates over EU countries any time soon.

It’s also worth exploring some specific points from Boris Johnson’s 31 January 2020 Withdrawal Agreement. The Withdrawal Agreement states that Northern Ireland will still be bound by the EU State Aid rules after the transition period ends. As such, the R&D tax credit rules in Northern Ireland can’t legally change even if the UK Government wants them too.

The political declaration accompanying the withdrawal agreement states that the rest of the UK will commit to the principle of level playing provisions. This means that England, Scotland and Wales have agreed to compete fairly with other EU countries. However, there are no details as to what this actually means.

As the political declaration is not a legally binding treaty, the UK Government could simply ignore the political declaration and do whatever it wants in England, Scotland or Wales. However, it’s unlikely to change the R&D tax credit rules, as it will make it harder for the UK to agree on future trade deals with other countries and would be unfair on businesses in Northern Ireland.

In summary, whilst leaving the EU technically allows the UK to have more control over R&D tax credit rules, I predict that Brexit will not cause any significant changes.

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