In a news article published by the BBC on 17th November, it’s reported that IPPR have called Government investment in supporting R&D 'deadweight' but have they got their facts right?
It was stated that “The Institute for Public Policy Research (IPPR) estimates that up to 80% of tax credits for research and development (R&D) are "deadweight” and IPPR have called for the subsidy to be “largely abolished” (BBC News: Call to end 'deadweight' research and development tax breaks).
I think there is a danger in this that could lead to throwing the baby out with the bathwater. R&D tax credits are available to both large and small companies, under two different schemes.
It may be that many large companies, that historically have enjoyed the lion’s share of the R&D tax breaks, would be able to fund their developments regardless. However for innovative Small and Medium E
nterprises (SMEs), the receipt of R&D tax credits is critical to their ability to survive and grow. This is particularly true for technology based companies and those that need to invest in developing technology to support productivity and efficiently measures across their business. R&D tax credits are also an important source of greater investment for SMEs that are seeking to develop new products or manufacturing processes.
Filling the funding gap
It is widely acknowledged that there is a funding gap in terms of investment for SMEs – indeed IPPR Commission on Economic Justice, in their discussion paper
, state that “There appears to be a significant finance gap for small, high-growth businesses, which are particularly important to shift the UK to a higher wage, higher productivity economy.”
“UK spending on R&D is well below many comparable economies Business spending on R&D as a percentage of GVA…”
So it is surprising to learn that IPPR is calling for the R&D tax credit subsidy to be “largely abolished” particularly when government data indicates that in the past few years the share going to SMEs has grown significantly. In fact the most recent government data (Research and Development, Tax Credits Statistics, September 2017
) seems to contradict IPPR’s view that most of the R&D subsidy is going to a few large companies.
“In 2015-16 the total number of claims for R&D tax credits rose to 26,255, an increase of 19% from 2014-15.
“The increase was primarily driven by a rise in the number of SME claims, which totalled 21,865 in 2015-16, up from 17,875 in 2014-15 (22% increase).”
“The cost of support for the SME scheme rose to £1.3bn, reflecting the increase in the number of claims and the rise in the enhanced expenditure rate to 130%, in 2015-16. The cost of support under the large company and RDEC schemes rose to almost £1.5bn in 2015-16.”
My experience in assisting SMEs to claim R&D tax credit is that the R&D subsidy is a very important plank in the funding mix that is needed if these companies are to survive and grow.
It will be interesting to see if and what new measures to support research and development based innovation are announced later this week in the Budget.