Brexit, tax and its effect on technology start-ups

Following the EU referendum, there is significant uncertainty surrounding its effect on future tax reliefs, incentives and funding for start-up companies. Obviously it is impossible to cover every issue here, however, below are initial thoughts on key areas for technology start-ups that may be affected by Brexit.

Don’t panic…yet

Firstly, nothing has changed since the vote to leave the EU. The same legislation and same tax reliefs will apply at least until Article 50 has been invoked. Thereafter, there will be a 2-year grace period before the UK has officially left the EU. With the recent political manoeuvrings of both major UK political parties, it would not be beyond the realms of possibility for Article 50 not to be invoked at all.

Regardless of Article 50, the main objective for the new UK Government is to steady the ship and provide confidence to the markets. It is therefore unlikely that any major negative changes to tax reliefs and incentives would be applied in the short-to-medium term, as any cuts would put the UK at a disadvantage for retaining and attracting business at a time when other EU countries are desperate to capitalise on Brexit, in particular the technology sector (see http://www.bbc.co.uk/news/business-36642560).

Tax reliefs and incentives currently available

The UK is currently one of the best locations for technology start-ups. Companies that undertake technological innovation and advancement are eligible for a number of incentives, including Research & Development (R&D) tax relief.

R&D tax relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds to technology start-ups in the early years of development. The R&D tax relief was, however, designed to comply with EU law and changed numerous times after objections from EU members who believed the relief was too generous.

The most generous of these is the SME Scheme, which is classified as notified state aid. Under EU law, a company can only receive one form of notified state aid. This means that if a company has already received state aid in relation to an R&D project, the company would be unable to claim for an R&D tax relief under the SME Scheme for the same project.

By leaving the EU, these restrictions would be removed, opening up the possibility for further relief being provided by the UK Government, in order to attract and retain UK-based technology businesses. This means that the already generous incentive could theoretically be enhanced further.

Although there is a possibility for further incentives in this area, this should be taken with a pinch of salt; it’s likely that this topic will be on the table for any EU negotiations.

Grants and funding – for universities and companies

There are worrying reports of EU universities pulling back on research collaborations with UK academics (http://www.bbc.co.uk/news/uk-politics-uk-leaves-the-eu-36719923) which may have an adverse effect for university spin-outs. The UK technology sector is underpinned by our strong academia, from research that becomes IPs for spin-out companies, to academics that inspire the entrepreneurs of the future. The UK has some of the best universities in the world and it is imperative that this continues through collaborations with other educational establishments. Hopefully these reports are just a shock reaction to Brexit and, once everything has settled, collaborations will continue.

Brexit also calls into question the availability of certain grants and funding for companies. Although Innovate UK funding is likely to continue, the availability of Horizon 2020 funding may be an area for discussion in future. Currently several countries outside the EU, such as Norway, are eligible to claim Horizon 2020 funding, suggesting access will likely be used as a bargaining chip at the EU negotiation table. This could lead to more companies fighting over lower levels of grant funding.

Entrepreneurial spirit

Although this briefing is fairly gloomy regarding the future, it is important to be reminded that the best minds will always excel in difficult situations, turning weaknesses into strengths. The current level of uncertainty could be an opportunity for budding entrepreneurs. The technology sector is founded on entrepreneurial spirit and has historically had closer ties with the US compared to the EU. It may be the case that the sector is better placed than others to adjust to Brexit. Only time will tell.

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