Think tank calls for R&D tax credit reform

A key think tank has criticised the effectiveness of the research and development (R&D) tax credit scheme, after it claimed that 80 per cent of such studies are “deadweight”.

The Institute for Public Policy Research (IPPR), which published the report, also claimed that a large majority of corporate research would have been carried out regardless of subsidies.

The call comes despite the fact that the UK has one of the lowest rates of business spending on research and development among “advanced economies”, spending just 1.7 per cent of GDP on research.

This is compared to 2.8 per cent in the US, 2.9 per cent in Germany, and four per cent in Japan.

But the IPPR said abolishing the scheme could save the British purse up to £1.9 billion a year. It recommends that the scheme should be reformed and directed towards projects which actually need help – rather than large conglomerates which already have the capital to invest in research.

Michael Jacobs, of the IPPR, said: “The Government is in danger of missing the point in its industrial strategy. Its focus so far has been on sectors engaged in technological innovation, like automotive and pharmaceuticals. But productivity in these sectors is already high.

“The UK’s productivity problem lies in the vast majority of ordinary firms, in sectors such as retail, light manufacturing, tourism, hospitality and social care.”

The Treasury said research tax subsidies help British businesses “innovate and grow”.

A Treasury spokesperson said: “For every £1 that goes on the relief, up to £2.35 in investment is created.

“Latest figures show that 83% of claims for R&D tax credits were from small and medium-sized enterprises.”

Tom Thackray, innovation director at the Confederation of British Industry, added: “Getting rid of R&D tax credits and the Patent Box during a time of uncertainty, would in effect only serve as a tax on the UK’s most innovative firms.

“While more can be done to get SMEs involved, more smaller businesses are using the tax credit each year.”