UK tax incentive ‘fails to deliver extra R&D spending’

The UK’s research and development (R&D) tax credit system is failing to prompt companies to increase spending and could prove a “costly failure”, a report claims. 

The Centre for Business Research (CBR) said aggregate business expenditure on R&D in the UK is as much as 15% lower than it was before the scheme was introduced in 2000.

As a result, the Government looks set to fall considerably short of meeting its R&D target for spending to reach 2.4% of UK GDP by 2027.

The R&D tax credit scheme, which either reduces corporation tax or generates a cash credit, is now used by 60,000 companies and costs the Treasury £7.3 billion a year.

David Connell, senior research associate at the CBR, said:

“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.”

The report was published around the same time as the Treasury started a consultation on modernising the R&D tax relief schemes.

This will consider all aspects to ensure reliefs “continue to be fit for purpose” and deliver good value for money for the taxpayer.

The most recent estimate put the UK’s overall R&D spending at 1.7% of GDP in 2018, a marginal increase from 1.6% in 2000.

The report also put the spotlight on the Treasury’s £1.1bn-a-year patent box scheme, which offers a lower corporation tax rate of 10%.

Greg Clark, chair of the House of Commons select committee for science and technology, said the report made “a powerful case for looking again at R&D tax credits and the patent box”.

Get in touch to discuss corporation tax.