As Brexit continues to leave a lasting mark of instability, businesses are caught wondering how things will shake out going forward. The UK heavily relies on trade with the rest of Europe. At the heart of trade lies innovation and introduction of new products and services to the market for competitiveness not just in Europe, but also in global markets. For the UK, to continue to succeed in trade, devising policies that facilitate and strengthen its innovation ecosystem will become ever more paramount.
Over the last 10 years a substantial number of countries have introduced business incentives aimed at fostering innovation. Among the incentives, R&D tax credit programmes have a prominent and increasingly popular role among the 45 OECD countries. In addition, tax incentives and grants, similar to the Patent Box regime, have been introduced by many OECD countries.
However, talent is the engine of any innovation ecosystem. So from a competitive standpoint, there is always competition for the right talent. Key European economies compete with the UK for tech talent, a competition that is compounded in post-Brexit Europe. These economies are:
Of the above countries, only Germany does not have an R&D tax credit, or a patent box type programme, though proposals are in the works for an R&D tax credit system. To offset the absence of R&D tax credit, Germany offers German businesses grants to the tune of €5 billion per year.
Another factor complicating the business environment is the geopolitical impact of the United States turning inward and detaching itself from certain aspects of the global economy by adopting a more nationalistic approach to global trade. While the latter puts many American businesses at a disadvantage, it certainly provides an opportunity to other countries to attract talent and gain greater share of world markets; all at the expense of American businesses.
Therefore, many businesses that intend to sell to global markets factor in the above dynamics. These dynamics impact their decisions in terms of selecting in which countries to operate. Hence the significance of R&D tax credits. R&D programmes are becoming more important not only to domestic companies, but also to those that decide to set up operations in the UK.
What Makes A Good R&D Programme?
A good R&D tax incentive programme:
a) incentivizes businesses to spend more on R&D than they would otherwise;
b) creates more skilled employment; and
c) assists businesses, especially small businesses, to reduce the risk inherent in innovation. While it is surprising how many countries do not track this information, the UK does. A job well done!
For every £1 of granted R&D tax credit, UK firms spend an additional £1.53 to £2.35 R&D tax credit programme was introduced between 2000 and 2002. It generally takes 10 years to create awareness about such programmes until majority of businesses that are eligible start making claims. For a short span of time, the UK has achieved a remarkable ranking in innovation, securing itself a spot among the world’s top five, (see the 2017 Global Innovation Index). This rise in ranking is significant compared to the one at the start of the millennium. Similar rankings produced by other organizations put the UK among the top five in the world.
How Does the UK R&D Tax Credit Compare?
The two tables below compare the R&D tax credit incentives in Ireland, US, France and the Netherlands to that of the UK.
Table 1: A Comparison of R&D Tax Credits / IP Tax Incentives between Selected Countries
**RDP’s rating of the overall client satisfaction of the programme, with 0 being not satisfied and 10 being very satisfied
***Scope of the R&D tax credit has been extended to some innovation expenditures such as prototypes, design and pilot plants for new products incurred by small and medium-size enterprises. For the said expenses, the credit rate is 20%, and applies to a maximum of €400,000 of innovation expenses (i.e., assessment basis)
Table 2: A Comparison of R&D Tax Credits/IP Tax Incentives between Selected Countries
Overall, the research and development expenditure credit (RDEC) scheme in the UK compares very favourably against the aforementioned countries for the following reasons:
- While France has a larger tax credit, the refund takes much longer to obtain. There is also a great deal of concern over the audits by tax authorities. France’s patent box scheme offers a much lower benefit than that of the UK.
- Ireland has comparable tax credit rates, but the risk of a Revenue audit is high with average reduction on R&D tax credit returns ranging around €80K per company audit.
- The Netherlands have a higher R&D tax credit, but the eligible R&D costs are restricted to only full time salaries; contract fees are not eligible.
- R&D tax credits in the US are very low and there is no patent box.
- One other positive aspect of the UK R&D tax credit programme: as long as the R&D work is under the direction and control of the UK entity and the costs are charged to the UK entity, R&D work done anywhere in the world can be claimed under the R&D tax credit scheme.
- Compared to its European counterpart organizations, HMRC is comparatively quick in processing claims and issuing refunds.
A very important aspect of any R&D tax credit programme is the ease of access to the programme. In the UK, HMRC has found a good balance between protecting the integrity of the programme to prevent abuse and over-auditing claims.
The OECD, which monitors the effectiveness of R&D tax credit programmes in countries that have such programmes in place, recommends against frequent policy reversals in R&D tax credit as they can minimize the impact of such policies on private R&D expenditure. To minimize uncertainty, it is therefore important that governments not tinker with such policies.”
Since its introduction, the UK has kept the administration of the programme consistent. Taxpayers understand that integrity needs to be maintained.
How Can UK’s R&D Tax Relief Improve?
Most businesses in the UK are aware of the R&D tax credit programme. There are now over 20,000 companies making claims so the programme has gained increasing maturity.
For more competitiveness, the amount of R&D tax credit for SMEs can increase. Companies need to see a clear stance on expenditure credit definition. Further, the Netherlands opened up their version of the patent box to any company receiving approval under their R&D tax credit programme. This means SMEs that have developed IP can be taxed at lower rates on the profits from that IP.
Canada has also introduced targeted funding and grant programmes for innovation. One interesting area is the idea of a Supercluster. As part of supercluster development, the government has asked various industries to submit applications for a industry vertical supercluster. An example might be a supercluster for AI/machine learning and big data. The supercluster would comprise start-ups, SMEs and large companies. Supercluster funds target contributions by both government and matching funds from respective industries. The intended goal is to be able to compete globally and create tremendous commercial opportunity.
As demonstrated by standard success metrics, the UK has done a very good job in incentivizing businesses to increase spending on R&D while improving the country’s international ranking in innovation.
Brian Cookson is President and Managing Director of RDP Associates.
For a complementary assessment of your eligibility for R&D Tax Relief and government funding, contact us at: [email protected] or call us at (0) 203-002-0089