The FT has noted this morning that:
The UK government's £7.3bn research and development tax credit system is failing to deliver significant additional spending by businesses, according to a report that warns the 20-year-old policy could prove a “costly failure”.
The data comes from the Centre for Business Research at Cambridge Judge Business School and suggests that R&D in the UK is now between 10 and 15 per cent lower than when the tax credits were introduced.
I admit to having long been a cynic of R&D tax credits. I always thought the greatest quantity of R&D they created was in the accountancy profession, seeking ways to relabel normal expenditure as R&D to claim the additional tax reliefs available.
Don't get me wrong: I think that there are beneficial tax reliefs. I also believe that they are much less common than has been generally thought by politicians, the Treasury and others for some time.
This is a case in point. If you want to encourage R&D it should be part of an industrial strategy. You do not want R&D generically: you want R&D specifically. The aim is to produce concentrations of excellence. And the way to achieve that is to give grants, and not splash money around in the hope that some will do some good.
Quite clearly the splashing the cash policy has failed. The UK is not creating the required excellence at much when we also very obviously need to do so. It is time for this tax relief to go, and with it all the opportunities for profit that it provides to accountants and a whole range of consultants. Instead, we need real innovation in pursuit of real goals. Picking winners and then backing them should be the policy. That's terribly untrendy, I know, but it's what we need to do.
And we should start with the technologies to support a Green New Deal.
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I have a small amount of experience in this because at our company a probably highly paid consultant from a well-known outsourcing company visits every year or two and asks us what we’ve been working on. We spend a few hours giving him a list and then he tries to work out what proportion of our time is spent on R&D for the purposes of claiming these tax credits. My proportion is 50%. Of course this is work I would have to do anyway, and I’m doubtful that it contributes to the greater good of humanity in any discernible way.
By the way I feel exactly the same way about the patents we’re encouraged to file (for bonuses!) They will never be licensed, probably never even be read. They exist solely to be measured by sheer weight in order to defend the company from potential patent lawsuits from other similar sized companies. Sort of the nuclear deterrent theory of “research”. Every time I see an advert or article where a company claims it’s innovative because it has filed x thousand patents, I die a little inside.
I remember the Audi ad that once said there were something like 9,000 new patents in a new Audi A4
And I thought 9,000 opportunities for tax abuse by profit shifting if the company was so inclined
The UK’s R&D tax credit has massive deadweight cost, rewarding people for things they would do anyway. As I understand it, the German system is much more targeted, based on subsidising activity you want to encourage.
“And the way to achieve that is to give grants”
Innovate UK, the government scheme, has given out grants worth £11.5bn since 2004
“you want R&D specifically.”
So does Innovate UK. It’s ‘4 Grand Challenges’ programme focuses on:
Artificial Intelligence and data
ageing society
clean growth
future of mobility
So, increase the value of the schemes
The cost of R&D tax credits in 2018-19 alone was £5.3bn. It was £5.1bn in 2017-18.
Grants of £11.5 billion since 2004 is about £0.7bn per year. Certainly better than nothing, but less than a seventh the spend on R&D tax credits.
Thank you
I think now more than ever the country needs to encourage R&D based companies. When much economically productive manufacturing now needs a scale involving international collaboration, that is going to become much less viable under a government that has created significant barriers to collaboration with neighbouring nations. One possible area for growth is the “knowledge economy” where the UK does have some strengths.
Whether or not that can be incentivised by the tax regime or by some grant structure is a technical question that would need deep analysis of where those approaches have or haven’t worked in the past. However there may be more important things the government could do to promote an R&D environment for business.
Some years ago my wife worked in the R&D section of one of the big pharmaceutical companies. They of course knew that R&D was the basis of the company’s future, so the real question was whether it would be conducted in the UK or in any of the other countries round the world they operated in. Talking to people there it was obvious that neither the tax regime nor any grant availability came high when they made that decision. What mattered to them was that there was a vibrant research environment, university labs close to the cutting edge generating PhDs they could take on capable of exploiting the latest methodologies or ideas. And an active community of other companies similar to theirs creating a market in more senior scientists.
Instead we have a government determined to undermine universities. University research, especially non-applied research which is where the latest ideas emerge, has been consistently underfunded. They don’t realise that the universities form an entire ecosystem which is interdependent, it doesn’t work just to fund Oxford. For example the head of the Oxford lab which was so quick to develop a Covid vaccine, Professor Sarah Gilbert, learned her research skills via a PhD at the University of Hull. Oxford (other “golden” universities are available) maintain their high profile by cherry-picking good researchers from other places, and without research funding to those places as well there isn’t the possibility of developing the talent pool sought by the either the biggest university labs or the major research-based companies.
Government-funded research labs can be part of the research environment too. Back when telephones were run by the nationalised Post Office they maintained a world-renowned research laboratory, and that meant in turn Britain was the base of many of the world’s most prominent telecommunication electronics companies. Nationalisation under Thatcher meant that those research labs were an early casualty of cost-cutting, and the associated companies dwindled and were bought and asset-stripped by overseas competitors. To be fair, the country does still maintain some of its excellent national labs in the molecular biology field (thinking for example of the MRC Laboratory of Molecular Biology in Cambridge) which is a factor in the relatively thriving biotech and pharma industries.
I agree with you on this
R&D tax credits would be much better spent on universities
Absolutely loathe this scheme. Glad it is being properly scrutinised at last. Just a wild diversion of resources to private sector following lobbying in my opinion. Absolute waste of time and money,
Tax reliefs – paying people to do nothing, created by people who do not understand tax. Great. What a country eh?
Most tax reliefs require you to have done something. Relevant questions include (a) is that something you really do want people to do (e.g. unintended consequences); (b) whether they would have done it anyway (deadweight); and (c) is there a better way of encouraging it (more cost effective, better targeted, etc)?