A new report published by the Centre for Business Research at Cambridge Judge Business School (CJBS) says that the R&D Tax Credit and Patent Box schemes aren’t successfully building towards government R&D targets.

The reason the government implemented R&D Tax Credits in the first place was to stimulate investment in innovation and meet their pre-set targets. The government set out to achieve a target of 2.4% of national income to be spent on R&D by 2027. The report says that this won’t be met if the R&D Tax Credit system only generates the current rate of investment.

Report’s main findings

  • Percentage of national income spent on R&D is between 10% and 15% lower than before introduction of R&D Tax Credits
  • Government claim of £1 R&D investment generates between £1.40 and £1.70 extra spending questioned
  • £500 million R&D Tax Credits are spent on R&D that’s happening outside the UK
  • 92% of companies benefiting from the Patent Box scheme are big multinational corporations

The report is called ‘Is the UK’s Flagship Industrial Policy a Costly Failure?’, written by a senior research associate at the Centre for Business Research at Cambridge Judge called David Connell.

In his Executive Summary, Connell says:

“The theory behind R & D tax credits, namely that a reduction in the cost of R & D will lead to an additional increase in a company’s R & D expenditure, is flawed. Since the scheme’s introduction in 2000, as a percentage of GDP, the amount companies themselves pay for R & D has fallen by at least a tenth.

“The Treasury’s R & D tax credit scheme has, by accident or oversight, become the Government’s flagship industrial policy. But without the scheme stimulating significant additional business spending, it cannot bridge the huge gap between current levels of business R & D expenditure and the level required to deliver on the Government’s overall target of 2.4 per cent of national income being invested in R & D by 2027.”

What are the solutions?

The report offers three solutions:

  • Get rid of Patent Box altogether
  • Make the R&D Tax Credit scheme more effective by making it smaller and more focused
  • New policies that help British science and technologies flourish, without being bought out by huge global companies

It’s seen as a simultaneous, three-pronged approach that will deliver much better value to the economy.

What’s the response to the report?

As reported in the Financial Times, HMRC said: “R&D tax reliefs have been a major success in incentivising UK companies of all sizes to invest in R&D, providing billions of pounds of support to tens of thousands of companies each year.”

Chair of the Select Committee for Science and Technology, Greg Clark MP, wrote the forward to this report. He said: “The paper makes a powerful case for looking again at R & D tax credits and the Patent Box – subsidies paid for through the tax system which cost over £8 billion a year: 16 times more than the match-funded grants available to businesses through Innovate UK.

“And around half a billion pounds is thought to be subsidising research conducted outside the UK. The Government’s drive towards an innovation-intensive economy as the prime objective of national policy represents a striking ambition and now is the moment to consider if we have the policies to achieve it.

“If more taxpayers’ money is going to be spent on what has been established as a national imperative, we need to know it can be expected to work – or else use it more productively to accomplish the desired ends.”

Given that the R&D tax relief schemes are under review by HMRC, we’ll have to wait and see if any of these recommendations become part of their R&D Roadmap in the future.

Jamie Smith