A view from abroad: Brexit and the impact on claiming under the French scheme

Matthieu Lestienne, Manager of Large Accounts at ABGI-France looks at Brexit and the impact on claiming under the French scheme

03 December 2019

Euro sand with british flag transitioning into british flag

A growing number of business are seeing competitive advantage in outsourcing functions including R&D and for many it can make sense to outsource these functions to the UK.
In this article we look at the impact Brexit could have on one of our nearest neighbours – France – and claiming outsourced R&D under the French scheme.

The UK was granted a new extension by the European Union till January 31, 2020 and we have a General Election on the 12th December. Regardless of the outcomes, there will be significant impact on French companies who deal on a regular basis with the UK.

Currently, the French Research and Development Tax Credit (CIR) allows research expenditure outsourced to the United Kingdom to be eligible under certain conditions. This amounts to 30% of expenses incurred for private providers and 60% for public organisations performing research services for the French company.

So what impact could Brexit have on the levels of R&D tax relief a French company outsourcing its R&D expenses to the UK might receive?

It’s worth remembering at this stage that, according to the General French Tax code, and subject to approval from the Ministry of Higher Education, Research and Innovation (Article 244c B), research services outsourced to private third parties are only considered eligible for R&D tax relief if:

1 - the business is registered in a Member State of the European Union (EU), or
2 - the business is registered in another State within the European Economic Area (EEA), subject to having entered into an administrative assistance agreement with France, to combat fraud and tax evasion.

So the question now becomes whether the UK, if and when it leaves the EU, also leaves the European Economic Area. So far this question doesn’t appear to have been settled.

As long as the United Kingdom remains a member of the EEA, the fact that there is indeed a "agreement of administrative assistance to combat fraud and 'tax evasion', fulfills the second condition mentioned above.

Several scenarios are therefore possible:

IN CASE OF HARD BREXIT

If the UK leaves without an EU or without an EEA agreement, the UK will have to be considered as a third state.

This means, the R&D tax relief agreements previously granted by the Ministry of Higher Education, Research and Innovation to private research organizations established in the United Kingdom will no longer be valid.

As a result, outsourced research expenditure from UK private or public sector research providers, will no longer be eligible for French R&D tax relief.

IN CASE OF SOFT BREXIT WITH AGREEMENT TO REMAIN IN THE EEA

In this scenario, the United Kingdom would have the same status as Iceland, Norway and Liechtenstein (three countries outside the European Union) for which outsourced R&D services are currently eligible for French research tax credits. This means expenses incurred in the United Kingdom would continue to be eligible for French R&D tax relief.

However, the outcome of the upcoming general election on December 12th may also have consequences for companies outsourcing research to the UK, which will be analyzed further after the next BREXIT deadline of January 31, 2020.

IN CONCLUSION

For spend outsourced to the UK in 2019, the rules for R&D tax credits do not change.

However, in the event of a no deal Brexit, from February 1st 2020, all services contracted out to private UK organisations could cost French companies 30% more and those subcontracted to UK public bodies, 60% more.

If this situation applies to you and your business, you should speak to an expert who can give you a holistic view of the international innovation landscape and help you navigate a successful outcome.