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How will Brexit affect R&D Tax Credits? Part 3

Posted on 16 October 2017 by William O'Brien

Part 3: Global competitiveness and conclusions

This is the third article in a series discussing the potential impacts of Brexit on UK R&D tax credit schemes. To read the earlier articles in the series click here and here.

Global Competitiveness

Another key aspect of R&D is the global, collaborative nature, particularly in sectors such as the pharmaceutical industry, and the UK government will be keen to ensure that changes required by Brexit are not seen to undermine our world class status.

We've seen a couple of instances recently where clients who service the pharma industry are facing competition from businesses proposing to move business to countries with what are seen as better tax incentives, with Australia being a common target. These clients operate as subcontractors to large companies, and so currently claim in the UK under RDEC, and at a first glance the Australian scheme looks very tempting. The Australian headline "R&D tax credit" deduction is 43.5%, vs an equivalent 11% for the UK RDEC!

This difference was so startling that we did some analysis to help the clients better understand what was going on and as with most things tax related the devil is very much in the detail. The most important factors were that the Australian main tax rate is 30%, vs the UK's 20%, and also that any R&D costs used for the 43.5% deduction are not included in any other P&L calculations. When we built a spreadsheet model to look at two hypothetical businesses doing the same thing in each country, it turns out that the R&D tax benefit actually realised is the same to within 1%!

That exercise highlights the need to look closely at all factors before making major decisions, but also showed that if our hypothetical companies were small businesses working on their own R&D then the UK SME scheme would be more than 3 times more generous than the Australian one. That would lead us be hope that with such a world beating initiative already in place, the UK does not need to make radical changes to be seen as an attractive place to develop new technologies.

Conclusions

You'll note we've stayed well away from politics in this article, and clearly issues around movement of products, services and skilled labour will have a major impact that is hard to predict at the time of writing. I hope we've highlighted some interesting food for thought in the meantime, and made the case for both UK businesses and government to really think carefully about all the implications before making significant changes to their innovation and development strategies!

WOCO Limited, BioHub at Alderley Park,

Alderley Edge, Cheshire, SK10 4TG

07752 057553