On 11 March 2020 the new Chancellor will step up to the despatch box and deliver the first budget of the Johnson Government. As an R&D specialist, I’m naturally interested in what the budget will include concerning R&D tax relief and whether Rishi Sunak will seize the opportunity of the UK leaving Europe to reshape the relief to further reward innovative companies.
Historically, we have tended to be cautious when changing corporation tax rates, being mindful of objections from other EU governments. But as the introduction of the 17% CT rate (the lowest in the G20) has been mooted, the Chancellor could also bolster our R&D tax credits schemes to make them more competitive and attractive to companies in the UK (beyond the 1% increase to the RDEC rate already proposed).
So what changes could we hope for and is there something to learn from our European neighbours?
There is a misconception among some business owners that R&D relief is an EU initiative, which operates in the same way across Europe and will disappear after Brexit. This is certainly not the case.
Firstly, it doesn’t just cover Europe – 30 of 36 Organisation for Economic Co-operation and Development (OECD) countries operate some form of Research and Development scheme including the likes of USA, China, Japan, and Australia. With such a disparate group of countries and socio-economic outlooks, there is bound to be a fair amount of variance between schemes.
It is true that, within the EU, the rules on which companies can claim under which scheme (SME or RDEC) originate from the same EC recommendation and that the rules on what constitutes an advance in science or technology are probably alike but there the similarities end. The tax regimes in different countries bear very little resemblance to each other, which means that the relief needs to operate in a variety of ways to accommodate domestic accounting and tax rules.
There are significant differences in how generous reliefs are. France tops the 2017 list of OECD and EU countries in terms of amounts of R&D relief paid out, based on expenditure incurred. It was significantly increased in 2008 to provide relief at 30% of eligible expenditure (on broader range of costs than can be claimed in the UK) up to €100M and 5% thereafter; and was described by the OECD as the world’s most generous R&D regime.
So, perhaps ironically, we could learn something from France and other more generous European schemes such as Spain and Ireland’s. The Chancellor could also consider:
- Increasing the SME uplift rate beyond the current 130%
- Increasing the limits for qualifying as an SME
- Broadening the categories of eligible expenditure to bring in additional cost categories fundamentally linked to R&D activities
- Relaxing rules on state aid and SME claims
Brexit is a chance to adapt R&D tax relief to suit the third decade of the millennium and it would appear that the only limit is the Government’s imagination. If the French can do it, why can’t we?
If you are wondering if your company should be making a claim for R&D tax relief, please contact us.
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