Research and Development (R&D) tax credits aren’t a new phenomenon but they are fairly recent to the UK. It is well understood that countries that can attract, and develop, companies with intellectual property.
If these companies can use intellectual property to develop new products, it will enhance the country’s tax base. Think of Microsoft, Apple or GSK and you may think of successful companies that are driven to success by commercialization of their R&D. They become important drivers in the economies of their resident countries.
Although the positive effect of R&D was suspected, it wasn’t until the 1990’s that economists examined the effects of R&D and compared the growth of the economy of countries. They found a direct, and predictable, correlation between R&D and the growth of gross domestic product (GDP). These results have influenced a number of countries to look at different ways to encourage R&D.
Research and Development can be paid from a number of sources such as grants, private investment, and more recently tax credits. Financing R&D by the use of government grants is open to criticism since lobbying can influence the direction of the funding. Private investment of R&D brings an expectation of direct future profit and therefore is prone to be used only on projects with high certainty of success in the short or medium term. Private investment is also volatile due to the psychological and material influences of economies. When the economy is looking good and profits are high R&D expenditures increase. In downturns, the converse is true.
R&D tax credits allow governments and companies to be jointly involved with R&D. Companies decide on the R&D they wish to pursue and governments assist with the funding, on a non-influential basis, by making contributions in a highly prescribed manner.
Posted on Monday, 9th August, 2010