Nicolas le Mintier, Managing Director of R&D tax consultancy company F.Initiatives, discusses the potential impacts of Brexit on R&D in the UK.
With the clock ticking, and just one year left until the UK officially divorces from the European Union, the potential impacts of Brexit on British businesses are becoming clearer. Of course, the process is notoriously uncertain, and everything could change right up until the point when a final deal is thrashed out between the UK and the EU. However, it seems pretty clear at this stage that Britain is headed for a hard Brexit, separating from every EU institution.
As an expert in R&D law, naturally, my primary areas of interest are the ways in which Brexit will affect R&D and innovation in the UK. At a glance, the wider picture is troubling. Even prior to the Brexit vote, the amount that the UK was spending on R&D was below the EU average, and less than half of what some countries, such as South Korea, are spending. Ultimately, it is likely that Brexit will cut the amount of funding that is spent on R&D further still. But why? The following factors are what will likely lead to a nationwide decline in R&D spending in the UK in the event of a hard Brexit.
If the negotiation between the UK and the EU ends in a hard Brexit, this will remove the UK from the single market, which allows free movement of people across EU member states. As a member of the single market, the UK has benefited from easy access to foreign talent, with many EU nationals having started a life in the UK. Leaving the single market means that UK-based EU citizens will be left with a choice; apply for residency or citizenship, go home, or move to another EU country. Indeed, many EU citizens are already leaving the UK for their homelands, such is the anxiety about the impact of Brexit on their lives.
So what impact does this have on R&D? But its very nature, R&D requires educated, bright individuals to execute it. From the early days of the UK’s involvement in the single market in the 1970s up to the present day, the UK has had easy access to a talent pool of smart individuals from across the continent. If the UK leaves the single market, that talent pool will get a lot smaller. Indeed, there is some evidence that this ‘brain drain’ process has already started, with many EU nationals leaving the UK in anticipation of the negative impact of Brexit on their lives.
Lessened investment in the UK
Thanks to the UK’s membership of the single market, it has – throughout the last few decades – been seen as an English speaking route into the EU market for foreign companies. Indeed, the UK economy has benefited greatly from corporations from countries such as the USA, South Korea, Japan and more pitching their European stall in the UK. Already, we are starting to see a number of global businesses pulling out of the UK and relocating to the continent. So what impact will this have on R&D? Naturally, the lowered amount of investment in the UK will lead to a decrease in R&D budget. While the UK’s SMEs partake in their fair share of R&D, the vast majority of R&D spending is carried out by big businesses. A business landscape that is unfriendly to big businesses to the point that it is actively encouraging them to leave the country can only be bad for the future of R&D in the UK.
What are the positives?
For SMEs, there are certainly some silver linings. The likely decrease in the amount of R&D tax credits claimed by big businesses may mean that there is more money ‘in the pot,’ so to speak, for SMEs to apply for. Under current laws, SMEs carrying out R&D may be eligible to receive 33p from every pound spent on R&D back from the government. Naturally, this is a significant help to small businesses, and the fact that it may be becoming easier to access these funds is certainly a positive.
However, with the future far from clear, it is still difficult to see exactly what Brexit will mean for R&D in the UK. As a business owner, the best thing you can do is keep informed of everything that’s going on. You should also keep in regular touch with your R&D consultant if your business relies heavily on R&D tax credits to carry out its daily tasks.
Nicolas le Mintier is the Managing Director of F.Initiatives, a London-based Tax Consultancy company specialising in R&D tax matters: https://www.f-initiatives.co.uk/