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What impact will Brexit have on funding for tech businesses?

With a lot of uncertainty around Brexit, many tech businesses are understandably concerned that grants backed by the EU either via Horizon 2020 (the EU framework programme for research and development) or the European Regional Development Fund may disappear in the future.

About the author

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

Stepping away from speculation, we have collated the key facts below.

UK Government funding

The UK Government’s funding of businesses’ research and development (R&D) was £1.7 billion in 2016, a decrease of £86 million (5%) from £1.8 billion in 2015. This represented 8% of business R&D expenditure and was a decrease for the second year running. UK government funding was mostly in the defence sector (£1.0 billion), which made up 57% of government funding of business R&D expenditure. Source: ONS (Office for National Statistics).

Government funding to UK businesses has fallen each year since 2013 from 9.9% to 7.8% of business R&D expenditure. If the overseas funding drops, will the UK Government step in to make up the shortfall? So far, they have only agreed to maintain funding obtained via the EU up to 2020, but surely this will only impact large multi-national businesses?

The impact for SMEs

Royal Society research into EU funding shows that 18% of Framework 7 (Framework Programme for Research and Technological Development) funding went to UK businesses out of a pot of nearly €7 billion between 2007 and 2013. The vast majority (around 70%) of this funding went to SMEs. If this source is not replaced, any drop in funding will disproportionately hit these businesses.

In most cases, SMEs taking out EU grants are technology innovators rather than technology start-ups. Exactly the type of high-risk business that VC and PE funds avoid until the owners can show a track record. Without these innovative risk takers, the UK will lack indigenous technologies to address the major challenges in medicine, defence, security and manufacturing without buying in solutions from overseas.

The good news is that the UK is fully committed to the EUREKA funding programme and has taken over administration of this scheme on behalf of the participating nations. Therefore, any call for proposals will be fully funded irrespective of our exit from the EU. The picture is slightly more complicated for Horizon 2020 where we may have access to the main funding calls but SMEs could struggle to access growth funding that is limited to the EU nations. Currently the UK position, in relation to Horizon 2020, is that Government will match funding up to 2020, but it is uncertain beyond the end of this funding round.

SMEs need to get smarter at accessing UK funding through the Industrial Strategy Challenge Fund and Innovate UK to maintain their proportion of grant funding. Going forward, R&D tax credits and other sources of support will become increasingly important to make the funding available to tech businesses last as long as possible.

Changes to the UK R&D tax credit scheme

On the 28 March 2019, HMRC announced a consultation on the implementation of a PAYE cap for SME cash credit claims. This consultation closes on 24 May 2019 so there isn’t much time to respond. Currently, the cap is proposed to be three times the total PAYE and NIC in the relevant accounting period. Where businesses are capped on the credit, HMRC are proposing to allow the company to access the credit in future years when staff numbers increase.

Who does this impact?

Companies with minimal salary costs in the UK
Companies with few UK employees and Directors taking dividends instead of salaries
Companies making extensive use of third party contractors

This proposal could detrimentally affect tech start-ups and increase the cost of creating a tech business in the UK. Businesses will have to consider bringing on-board employees earlier than in the past to ensure the company can access the R&D tax credit scheme. However, taking on employees removes the flexibility to readily pivot the business by changing contractors and places a major headache on business founders to find the right technical resource very early on.

For more information on the above or if you think your business may be affected by the R&D consultation, please get in touch via the form below and one of our specialists will be in touch.