Boris, Brexit and RDEC: Our election analysis

Now with an undisputed working majority, the electorate has given the Conservatives full license to enact their manifesto. That means, of course, “getting Brexit done” – but our EU exit isn’t the only thing on the to-do list.

Throughout the election campaign, Boris Johnson frequently lamented the gridlock that Brexit had caused. Indeed, the UK’s 5.7 million SMEs have spent too much of the past three years arrested by uncertainty.

But now at least, no matter which way you voted, there is some degree of certainty for the next five years.

We know that Corporation Tax (CT) will be maintained at 19% under this government, shelving previous plans to lower the rate to 17%. The Seed Enterprise Scheme and Enterprise Investment Scheme will continue as before, too.

Overall, despite its pledge to “redesign the tax system”, the Conservative Party’s manifesto tinkers with rather than overhauls the UK’s tax system.

An increase to the RDEC rate

One notable change, however, is an increase in the research and development expenditure credit (RDEC) rate from 12% to 13%. It’s not an earth-shaking increase perhaps, but it’s the latest in a series of incremental increases over the years and we’re pleased to see it.

The RDEC rate crept up from 10% to 11% in 2015, and it was increased to 12% in 2018. This latest bump illustrates how the incentive enjoys substantial government support. RDEC and the SME R&D tax credit will continue to operate in tandem.

Of course, the distinction between the two incentives is fuzzy. RDEC is nominally the large company R&D incentive – but it’s not only big business that uses the incentive. RDEC is also accessed by SMEs who have been subcontracted to do R&D work or who have received a grant or subsidy.

It’s good news for these SMEs, too. The Tory manifesto also makes a welcome pledge to review the definition of R&D so that areas such as cloud computing and data are adequately incentivised.

“I expect this review won’t be about the definition of R&D per se. Instead, it will be more about the eligibility of costs like cloud hosting and data storage,” says Jenny Tragner, director and member of HMRC’s Research & Development Communication Forum. “Like rent, these costs can be significant, they can also legitimately be essential to the R&D, but aren’t currently eligible.”

She adds, “We welcome this review of R&D costs, although change causes its own complexity which isn’t normally positive for SMEs. But software is such a fast-moving area, so making sure that software R&D is properly and consistently incentivised is positive.”

RDEC increase melts Corporation Tax freeze

The cancellation of the long-mooted lowering of the CT rate to 17% might be disappointing to some businesses, but the increase in the RDEC rate will be a welcome boost for large companies and, let’s not forget, the many SMEs who also use RDEC.

A more generous RDEC incentive will lower tax liabilities at an almost comparable rate to the now shelved CT rate cut. The increase turns RDEC into a more robust companion to the more generous SME R&D tax credit.

R&D tax credits will be more vital than ever as the UK’s businesses forge a new path for our economy beyond the European Union. To simply view the incentive as a tax break would be a big mistake: it helps businesses grow, hire new staff, take on bolder projects. There are plenty of reasons to be excited about the future.