R&D incentives have been in the UK since 2000, when the R&D tax regime for SMEs was introduced. However, the imminence of Brexit has prompted many to ask whether they will continue into the future.
Well, allow me to allay your fears – the R&D regime is here to stay. It is a UK government incentive and the legislation is not drafted by Brussels. A more pertinent question to ask is “How do we compare to the rest of the world?”
Well, the answer is we are still playing a game of catch up. The UK was late to the party, introducing its scheme in 2000, which was behind Canada (1944), France (1983), the Netherlands (1994) and Spain (1996).
It is therefore no surprise that the amount of relief we offer is slightly lower than the rest of Europe with an effective rate of relief of 19-33% of qualifying spend (depending on the company’s tax position) which is still behind France at 30%, Spain at 25-59% and Netherlands (32-40%).
However, it’s not all bad news: the UK compares remarkably favourably with other European countries when it comes to the administration burden required to claim R&D. For example, in Spain all activities must take place in the European Economic Area and extensive backing documentation must be provided, including clearly defined project start and end dates. In France subcontractors need to be approved by the French Ministry of Research and in Belgium the claimant company must inform the government as soon as an R&D project starts with a project name, description, and start/end dates. In the Netherlands timesheets are mandatory and records must not be more than 2 weeks out of date, while HMRC expect record keeping of R&D activities carried out to be the norm for repeat claimant companies and best practice.
Furthermore, there are restrictions in place for payments of tax credits in other jurisdictions – for example, in Spain the restriction is determined in reference to R&D spend for prior years. In France, Large companies can only receive payment if they cannot offset their credit against corporation tax for 3 consecutive years.
Lastly, HMRC’s stipulated turnaround time of 28 days for payment of R&D claims is surprisingly fast compared to other countries such as Spain (1 year after filing) and Canada (120 days).
In conclusion, although the UK currently offers a lower effective benefit than many other developed countries, the rate of relief is only likely to increase as we catch up to competitor countries and aim to attract and retain R&D investment in the wake of Brexit. This is shown by the increase in RDEC (for large companies) from 11% to 12% from 1 January 2018, as well as the historic growth of the R&D super-deduction from 50% of qualifying spend in 2000 to 130% in 2015 (for SMEs). Moreover, the UK can take comfort in the fact that it has the appropriate level of administration of the R&D regime in comparison with other developed nations and is less restrictive in a significant number of areas (but not all) than many other countries, allowing companies to claim and receive their R&D tax benefits more efficiently.
It is fair to say more can still be done by the UK government to catch up with other developed countries’ investment in R&D activities. It is worth noting that other routes such as Innovation grants are being used outside of the corporation tax mechanism for delivering competitive R&D investment and attracting multinational companies to the UK. Post Brexit, R&D incentives will become an even more pertinent topic companies will discuss in their boardrooms when making strategic decisions!
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