“The Internet is the first thing that humanity has built that humanity doesn't understand, the largest experiment in anarchy that we have ever had.”
― Eric Schmidt
Until Brexit 🙁
The latest ONS statistics suggest claim numbers which correlate to some extent to investment in R&D have continued to be strong for the year ending March 2018.
But there are some negative impacts from Brexit preparations to date.
- Rumour has it that the one reason for the painful delays in R&D Tax Credit claim processing have been down to HMRC staff reassignments due to Brexit. Hopefully after a complaint by ICAEW this has improved. But communication with HMRC when claim processing is late remains extremely testing. Any delay is extremely damaging to start-ups struggling for cash flow.
- The consultation on the proposed new PAYE cap will now be on hold as a result of the general election. This measure is unlikely to impact many R&D Tax Credit claims but could hit start-ups who use subcontractors and don't have a large amount of PAYE and NIC to consider for the cap. It is concerning that no decision has been made for a policy due to be implemented for accounting periods starting on 1st April 2020.
What have the parties been saying about Corporation Tax?
Conservatives – They have put on hold the proposed cut in corporation tax due to be in place from 1st April 2020 to 17%. This will mean HMGOV has an extra £6 billion.
Labour – A proposed increase in corporation tax gradually to 26%. A review of corporate tax reliefs. I have read some coverage saying that this will mean scrapping of the R&D schemes, including BBC reporting. I am not sure from reading the source material that scrapping has been stated unless you take the view that the result of the review is inevitable, which leads to the question why have a review? The manifesto does have a stated aim of getting R&D to 3% of GDP through an increase in direct funding. Which implies they favour grants over tax relief. Grants are far more time consuming and less certain to gain than R&D tax relief. More time to get funding means less time spent on R&D, tax relief is a more efficient and fairer support mechanism.
Liberal Democrats – A proposed increase in corporation tax from 19% at present to 20%, which is where it was before 1st April 2017.
- Surely at some point the uncertainty will end. But at present the election has probably made things worse. It is hard to predict where company taxation will end up with the current spending bidding war between all the major parties. Higher corporate taxes will not help business to invest and create jobs but the money has to come from somewhere. Across the whole political spectrum we appear to have the least capable politicians for some time. If you project the known numbers on R&D claims forward to the present, it is likely the scheme costs over £6 billion per annum. This is an interesting number. It is about the difference between the Conservatives and Labours pledges on NHS spending. It is about the amount raised in inheritance tax. For desperate politicians it is a tempting number and perhaps not as “sexy” an issue as others when trying to win votes. It is a concern that they will make poor decisions that harm SME driven economic growth & international competitiveness about the R&D schemes.
- The R&D schemes and particularly the SME scheme are heavily impacted by EU regulation. R&D claims are a form of state aid. The potential exists for simplification and improvement of the scheme if we don't need to follow the rules set by the European Commission. This could be a positive. One EU imposed “rule” is that the SME scheme is at the maximum permissible level. So in theory if full sovereignty is delivered by Brexit the level of R&D support could increase. But will that be a priority against other spending increases? In the short term it appears we will follow the existing rules no matter what type of Brexit is delivered so the aspirations of increased support and reduced red tape may take sometime to even be possible.
Brexit remains a mess and the political crisis we are in has damaged the reputation of the UK no matter which side of the debate you sit on. But at present Brexit is outside anyone's control and it is not certain if we get another hung parliament things will change. It is key to remember that funding the R&D schemes is an investment in the future. But with the current experiment in anarchy all bets are off.
Christopher Toms, Technical Director – RandDTax