- Driving economic growth through an internationally competitive R&D tax relief.
- ‘Above the line’ credit recommended to increase the impact on R&D investment decisions.
- Increased R&D investment, job creation and company profit outweighs net cost to Exchequer.
Reforms to R&D tax credits could drive an increase in R&D investment in the UK and boost job creation, according to an independent report published today.On the back of the report, EEF and SMMT are calling on government to create a truly internationally competitive R&D tax credit regime, by strengthening the link between the credit and R&D investment decisions, removing the link with corporation tax in favour of an ‘above the line’ credit.
The change would incentivise major private sector and foreign investment in UK manufacturing, create high-value jobs, support government’s move to rebalance the economy, enhance the UK’s global competitiveness and drive economic growth.
The report, commissioned by SMMT and EEF and prepared by PwC, involved discussions with over 30 key UK R&D investors across a range of business sectors and is being presented tomorrow at a briefing with MPs and government officials.
Based on the findings of the report, EEF and SMMT are urging government to introduce a cash benefit or redeemable credit at the point R&D costs arise, rather than providing a relatively opaque offset against corporation tax payments. The change will provide a stronger incentive for the UK’s biggest R&D spenders to increase investments here and attract new foreign investment to the UK.
The report estimates that the change could increase R&D investment in the UK by nearly £390 million per year and increase economic output by £665 million in the short-term, outstripping the £205 million net cost to the Exchequer by a factor of three.
“Measures to boost growth have to be the government’s number one priority given the weak state of the UK economy. Encouraging high value investment and innovation by UK-based companies as well as attracting foreign investment is crucial for ensuring UK manufacturing and the wider economy can continue to grow. Government must now seize the opportunity provided by its own consultation to make a big difference to the way the credit operates and send a strong signal about the UK’s commitment to R&D. By doing so it would stimulate private sector and foreign investment and help support long-term economic growth,” said Terry Scuoler, EEF Chief Executive.
“For UK manufacturing to take advantage of the global shift to a low carbon economy, we must secure an increased share of global R&D investment,” said Paul Everitt, SMMT Chief Executive. “Automotive is Europe’s largest investor in R&D and the changes proposed will encourage companies to invest even more. Many countries are keen to secure high value R&D investment and it is essential the UK business environment remains globally competitive and attractive to international investors.”
“An incentive which reduces the cost of R&D, directly affecting the budgets of individuals involved in R&D investment decisions, will be much more effective” said Diarmuid MacDougall, R&D and Patent Box Partner at PwC.
The current R&D tax credit system is linked to corporation tax payments. Non-profit making companies, typical throughout the manufacturing sector, have no immediate incentive to sustain or increase their R&D activities in the UK. As such, there is periodic pressure to review the commercial attraction of a UK location in favour of international alternatives. The current regime does not work for many large companies and is not competitive with international schemes.
Based on the findings of the PwC report, EEF and SMMT are calling for change to the current regime for large companies to make the R&D tax relief effective, certain and highly visible to investors whatever their UK corporation tax position is. It is recommended that an ‘above the line’ credit is applied to enable companies to count the credit as a direct cost relief against R&D spend in the UK in the planning phase, resulting in a tangible reduction in R&D costs for projects in UK. The certainty and immediacy of the benefit, and its visibility, would support spending on funding during the innovation phases of the investment and business cycles, supporting cyclical industries such as automotive and increase the attractiveness of the UK to foreign HQs deciding where to locate R&D spend, enhancing the UK’s global competitiveness.
The gains in incentivising and stabilising UK R&D spend would off-set the cost implications to the Exchequer through increased investment and stronger economic growth.