The UK's R&D problem

Britain's £1.3 billion research and development tax credits may not be having as much impact as hoped, according to a report by Gabriel Rozenberg in today's Times, R&D tax credits a poor catalyst

The Government’s £1.3 billion flagship scheme to boost research and development is failing to encourage new research in almost half of the businesses it helps, a survey has shown. Just 57 per cent of businesses who use R&D tax credits said that they felt the credits were an incentive to undertake further R&D, a survey conducted by HM Revenue & Customs has found.

The blow comes just a month after the first annual drop in R&D spending by companies since Labour came to power was identified by the Office for National Statistics. R&D spending fell by £474 million last year, official figures showed.

The tax credits were introduced in 2000 to raise business R&D and in turn promote innovation and productivity. But taken together, the results paint a picture of a system of tax credits that reward companies already carrying out R&D work but fail to stimulate additional investment in innovation.

Vincent Cable, the Liberal Democrat Treasury spokesman, said: “The Chancellor has wasted £550 million on companies who would have carried out the research anyway. This is simply not good value for taxpayers.”

The survey found widespread awareness and interest in the tax credits among businesses, with 82 per cent saying they knew of the scheme and 86 per cent of claimants saying that at least one of their claims had been successful. But claiming relief for projects did not appear to encourage investing more widely. Fewer than a fifth of companies said that they took the expected value of tax credits into account when setting their R&D budget.

The system also appeared to be overly complex, with a third of companies that had not made a claim saying that the benefit of the tax credit would not justify the effort of applying.

The reports cited is HMRC Research Report 12, published this month, Research and Development Tax Credits: Final Report (PDF), written by BMRB Social Research. Here is the key excerpt from the executive summary:

Most respondents had a positive view of the potential effects of R&D tax credits. Overall, 57 per cent of claimants and 58 per cent of non-claimants felt that R&D tax credits were an incentive to undertake further R&D.

If the tax credits were having an impact on willingness to undertake R&D one would expect the figures for claimants to be higher than non-claimants. But there was no significant difference.

The annual R&D figures cited in the Times story were published on 25 November by the Office for National Statistics: Business Enterprise Research & Development (1.2Mb PDF). In real 2004 prices, civil R&D spending fell by 6% in 2004 compared with the year before - down 3% in services and by 8% in manufacturing. Expenditure on R&D performed in UK businesses fell to 1.1% of GDP, after being steady at 1.2% for at least the previous seven years. Not exactly an inspiring performance.

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