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Blog: Tax Talk – How will Brexit affect R&D tax relief?

Date: March 21, 2019

By Caroline Walton, Specialist Tax Consultant and Patent Box Lead at Catax.

Theresa May will today appear before EU leaders at the EU Summit in Brussels to request a three-month extension to the UK’s departure from the European Union. With it currently unclear as to whether, and if so when, the UK will leave the EU and on what terms, it has never been a more uncertain time for UK companies in terms of being able to plan future business and tax strategy.

Brexit will be of understandable concern to companies who invest in innovation, and for whom Research & Development (R&D) activity is central to new product and process development and a crucial part of their growth strategy. There will be concern about the availability of tax incentives post Brexit to encourage companies to invest in innovation; in particular, the availability of R&D tax credits and whether the existing R&D schemes will be withdrawn or amended.

There will also be concern about the impact of Brexit on a company’s existing IP portfolio; the impact that Brexit may have on existing and pending IP. There may also be concern about whether the existing Patent Box tax incentive regime will still be available at all post Brexit or whether a company’s IP may be affected by Brexit which would adversely affect a company’s ability to claim relief under the regime.

Whilst a delayed Brexit is of undoubted difficulty to UK companies when planning future tax and other commercial strategies; some comfort can be drawn from the fact that there is not likely to be any immediate impact on the existing R&D tax incentive schemes. The funding for the existing R&D tax incentive regimes is provided by the UK government and will continue, unaffected by Brexit.

This was confirmed recently by HMRC at their regular R&D Consultative Committee meetings which Catax attend. They reiterated that R&D tax relief was here to stay and there were no imminent changes, except to amend some EU based definitions into UK only definitions.

The UK government has historically shown commitment to the schemes by increasing the value of benefit available to companies in order to attract innovation to the UK. Retaining innovation in the UK post Brexit is going to be very high on the UK government’s list of priorities  There is no doubt that the R&D schemes will remain with it possible that they will be revised to allow for an increased benefit to encourage companies to make the UK their centre of innovation.

Once the UK leaves the European Union, the UK and its R&D tax incentive schemes will no longer be affected by EU regulation. Whereas currently, companies in receipt of European State Aids are obliged to reduce the value of their R&D claims with projects claimed for under the SME scheme being disqualified in their entirety, the UK government will be free to restructure the R&D regimes post-Brexit, free of any concern about interference from Europe. It is likely that the benefits available under the schemes will be made more generous to encourage companies to remain in the UK rather than relocate.

For the same reason, it is not likely that the UK government will withdraw the Patent Box as a tax incentive. Brexit does, however, provide the UK government with an ideal excuse to revise the regime to make it more attractive to companies owning patents and who subcontract their R&D to subcontractors or other group companies.

On 30th June 2016, the UK government amended the provisions of the Patent Box to bring it in line with recommendations made by the OECD Forum on Harmful Tax Practices, however the effect of the changes was to make the Patent Box less attractive to companies not undertaking R&D in-house. The changes have had the effect of adversely affecting the amount of benefit available under the regime, and they have undoubtedly negatively impacted the number of companies claiming the relief. Brexit provides the ideal opportunity to revise the legislation underpinning the scheme without fear of EU interference.

As regards a company worrying that Brexit could adversely affect the validity of their existing IP in terms of existing or pending patents, it will be of relief to learn that Brexit will not cause any change to occur to the patent application processes followed by the UK Intellectual Property Office (UK IPO)  and the European Patent Office (EPO) because neither the UK IPO or the EPO are EU institutions. Patents granted by the UK IPO and EPO remain valid and qualify for the Patent Box, as they did before and patents currently filed but not yet granted by the UK IPO and EPO also remain unaffected by Brexit.

Post-Brexit, the UK will continue to be a contracting state to the European Patent Convention (the international treaty which established the EPO). Out of the thirty-eight countries which are contracting members of the European Patent Convention, ten, currently, are non-EU members. Post-Brexit, the UK will become a non-EU member country and the process of applying for a patent and validation in contracting member states will remain as before. Patents granted to the UK registered companies by the EPO will, therefore, continue to be valid for the Patent Box.

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