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Post Brexit Growth & R&D Tax Credits

Date: 12th May 2017

 

"This is the first age that's ever paid much attention to the future, which is a little ironic since we may not have one.”

- Arthur C. Clarke

Predicting the fall out of Brexit is challenging but one of the horses our politicians appear to be backing is that an increased focus on Research and Development (R&D) will enable us to depending on your degree of optimism survive or prosper.

As a concept it is hard to be against R&D. For a politician it would like being against employment or growth. But what you do to achieve that goal is the billion pound question. The latest figures from the ONS on R&D for 2015 are open to much interpretation.

In 2015 R&D continued to grow in the UK, expanding by £1.2 billion to £31.6 billion, an increase of 4%. Good news.

66% of R&D is undertaken by business. Meaning initiatives that encourage business to do more R&D, like grants or R&D tax credits, will impact the biggest participators in R&D directly.

Negatively, we rank 11th in the EU on R&D intensity as percentage of GDP. Sweden, Austria, and Denmark are the only countries, so far to have met the 2020 EU target of 3% of GDP in R&D expenditure. The UK performance of 1.68% is below the EU average of 2.03%. The two most comparable countries in terms of size to the UK in the EU, Germany and France, achieve 2.87% and 2.23% respectively.

These numbers show we have definite room for improvement.

Will leaving the EU help?

It is very hard to take a definitive position.

Grants and R&D tax credits are forms of subsidy. The EU has competition rules which limit those subsidies, notified state aid etc. So on the face of it we leave the EU, do what we want, R&D will boom as we can, for example, start giving out Australian or Canadian levels of R&D tax credits.  Schemes in those countries look more favourable than ours, at least at face value.  Let the good times roll.

However, as with much of Brexit the reality is more complex. Will the UK for example have free access to European Markets if our government policy is seen as “unfair” in competition terms? Realistically we have “a snowball in hell’s” chance of the EU accepting that. So it will be business as usual or isolation. We will be no better off in terms of R&D by business because we will have to behave in a way acceptable to other countries even if we retake our sovereignty. In or out we are all connected.

Conclusions

That R&D is vital to the UK economy is undeniable. The statistics you can always argue about. Do Swedish companies do more R&D than we do? Or do they simply have a better understanding of, or reporting mechanism for, R&D? My experience in the R&D Tax credit consultancy market would suggest that many UK companies are doing qualifying R&D but fail to identify it until they take advice from an expert. This approach will feed through to the numbers reported to the ONS on which they base the statistics. R&D can be hard to define, scope and quantify. One of our clients who found out about the potential claims after many years where he could have claimed but did not; recently said “seven years later I have still not calculated what not claiming R&D Tax credits cost our business that would be too stressful”.

My crystal ball in regards to Brexit is no more enlightening than anyone else’s, but my hunch is that not much will change in terms of rates. But what I can say is that UK companies are losing hundreds of millions and perhaps billions of pounds in potential R&D Tax Credit money by not identifying that they are doing R&D, not appreciating the full scope or just not knowing about the scheme. The multiplier effect of this loss of revenue on an individual or national growth level is likely to be huge. Not claiming hits growth. In uncertain times this an undeniable truth. If you have not looked into claiming R&D tax credits you should talk to an expert today.

Chris Toms, Director

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