what ’ s in it for the innovation economy ?
Sector News News
The Brexit debate –
Maria Kitt
CORPORATE TAX PARTNER AT TAX INSIGHT LLP
what ’ s in it for the innovation economy ?
Maria Kitt , Corporate Tax Partner at Tax Insight LLP , takes a look at how Brexit might impact on R & D companies in the UK
If the UK votes to leave the EU , it will assume economic responsibility for its own finances , tax policy and tax harmonisation . This would include the R & D tax incentive programme , but what would become of the EU-centric R & D grant-based support and initiatives run for innovative companies ? Is tax and grant support feasible or will this be at the heart of a revived ‘ innovation economy ’ in a reformed UK ?
At a glance , R & D grant support from EU programmes had paid UK ’ s R & D companies five times the amount of support from the sixth and seventh EU Framework programmes [£ 1.1bn ], compared to ‘ tax ’ and ‘ tax credit ’ based funding . Current EU grant funding for R & D is strategically both long term and multi sector ( the Horizon 2020 programme ); the UK will have some way to go to provide long-term funding stability and the confidence that comes with it .
SME R & D tax relief is an EU State Aid . This brings with it a strange variety of EC regulation including an overall project cap of E7.5m and the ability to clawback relief where a project is split between grant and tax incentive funding . Hardly onerous rules for smaller innovators , but one could also point to the seven year delay in legislating the newer creative sector reliefs , particularly the video games tax relief , caused largely by delayed EU approval and amendments .
Little or large ? Worldwide R & D expenditure is naturally dominated by large companies and that is certainly the case in the UK . This begs the question , where are the UK ’ s main R & D marketplaces actually located ? Statistics show that more than 80 per cent of UK
The UK ’ s high propensity to export its R & D services is a significant part of the annual £ 21bn invested in the innovative economy
R & D activity is exported ( commissioned from abroad ), hitting $ 11bn in 2015 . Clearly export markets are key . This pattern is not new and has become more pronounced , with UK to non UK R & D activity increasing by more than a third since 2007 .
In terms of absolutes , the EU R & D spend ranks third globally , lagging behind the US and China . The UK then accounts for less than 10 per cent of the top three investor groups . Impeding the UK ’ s contribution to worldwide R & D investment is unlikely to make an international impact . But on a stand-alone basis , would even 10 per cent still be sustainable ?
Go West ? Quite possibly : The EU is not the only option of course , but then Brexit is not the only economic deal affecting the UK / EU under discussion of course . The secretive Transatlantic Trade and Investment Partnership ( TTIP ) talks have advanced considerably since they first began in 2010 . Although most of the discussion threads are classified material and unavailable for public discussion , the leaking of key strategic policy notes last February shows the appetite for a bilateral US / EU trade partnership , a significant marketplace indeed .
Interestingly , innovative industries ( pharma , telecommunications , automotive etc ), play a key role in TTIP policy – Brexit needs a wider dimension combined together , EU / US markets account collectively for more than 60 per cent of global GDP .
A new Lisbon Treaty ? Not quite . Although the EU can trace its origins to the now obscure coal and steel industry agreements , Brexit goes far beyond a simple trade deal . It also needs to look at other international dynamics such as the US appetite for trade globalisation .
Is that a ‘ no ’ then ? The sheer size of the EU economic opportunity whether bolstered by an EU / US trade partnership or not remains irresistible for many UK techpreneurs . The UK ’ s high propensity to export its R & D services is a significant part of the annual £ 21bn invested in the innovative economy .
Perhaps the only certainty is that 30 years on from now , we will no doubt review the reformed UK trade and economic associations and ponder the way ahead yet again .
Maria Kitt can be contacted on maria @ tax-insight . co . uk
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