We look at recent white papers analysing the impact of government incentives on R&D.
Government tax incentives for R&D have become an increasingly popular policy of supporting innovation, not just in the UK, but across the world.
Research and Development Tax Credits were launched, in the UK, back in 2000 and the scheme is administered by HMRC. The principle is very straightforward and is a win–win scenario for both the UK economy and the eligible companies. If the government can make it easier through tax relief for companies to invest in innovation, then it is more likely that these companies will undertake innovative projects to benefit their business growth and contribute to the UK’s future success and standing.
Since its launch, the benefits of the scheme have increased significantly, so there has never been a better time to claim, especially for small and medium sized businesses.
However, there are detractors of these fiscal incentives who argue that although the costs of research and development tax relief increased from around £100m in 2001 to more than £1bn in 2011-12, the actual amount of business expenditure on R&D has stayed more or less the same.
So, we ask ourselves, do R&D tax incentives actually work?
A recent paper published by the Centre for Economic Performance at London School of Economics and Political Science concludes that “yes”, these incentives are effective in increasing national levels of innovation.
The white paper highlights the issue that researchers mainly focus on the effects of taxes on R&D, whereas the point of the policy is to try and stimulate innovation. It is therefore crucial that the effect of R&D tax incentives must be analysed by not only looking at R&D expenditures but a range of other indicators including the development of intellectual property, evidenced by patenting activity, and productivity gains in industry.
They conclude that the policy caused an economically and statistically significant increase in R&D and patenting. They note that over a period up to 2011, aggregate business R&D would be around 10% lower in the absence of the tax relief scheme.
Add to that the government’s own studies, which have shown that every £1 of R&D tax relief leads to between £1.53 and £2.35 in expenditure on innovation projects, creating a knock-on effect through the wider economy, and the conclusion leans toward the fact that R&D tax policies do seem effective in increasing innovation.
At Jumpstart, we are lucky to be able to witness first-hand the positive impact R&D tax relief can have on a business. Our clients regularly tell us how receiving R&D tax benefits allowed them to re-invest in further innovation, hire new staff, buy new machinery and grow their business. We’re proud to work in an industry that’s central to the growth of our local and national economies.
