Official: RDEC is the Most Effective Innovation Investment Incentive

Official: RDEC is the Most Effective Innovation Investment Incentive

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Official: RDEC is the Most Effective Innovation Investment Incentive

Reports commissioned by HMRC suggest that the research and development expenditure credit (RDEC) scheme is the most effective incentive for encouraging additional investment in R&D.

Three research reports published on 17 November evaluate the economic impact of the RDEC, SME R&D tax relief, and patent box regimes. The reports suggest that all the regimes encourage investment, although the overall impact on the economy of this additional investment is unclear.

According to the reports, the RDEC generates between £2.42 and £2.70 for each £1 cost to the exchequer, while the support for SMEs generates between 75p and £1.28. The patent box report meanwhile suggests that those businesses using the scheme invest 10% more in the UK compared to organisations not in the scheme.

The reports were produced by three different sets of authors and had different scopes. The report into the SME R&D relief scheme is the most comprehensive and provides an independent evaluation to address the requirements of the evaluation plan stipulated by the European Commission. Meanwhile, the Patent Box report addresses recent recommendations from the National Audit Office and Public Accounts Committee.

SME R&D scheme

The report by London Economics and OMB Research shows a surge in the number of businesses claiming the relief since 2012/13 (linked to policy changes that increased the generosity of the scheme). At the same time, the amount of expenditure per claim on which relief was claimed has decreased, suggesting that smaller businesses were gradually encouraged into the scheme.

The additional R&D expenditure generated per £1 of the cost to the Exchequer under the deduction scheme is estimated to be anywhere between 75p and £1.28. For the SME repayable tax credit scheme, the additional expenditure is estimated to be between 60p and £1 for every £1 of exchequer cost.

The report suggests that additional percentage increases in the tax relief available are likely to produce diminishing results, with a further 20%–60% increase on current tax deduction rates required to encourage most businesses interviewed to undertake additional R&D investment.

The report also evaluated whether tax relief is the best financial instrument to incentivise innovation expenditure. Some respondents interviewed were sceptical about the likely administrative burden associated with accessing grant funding instead (given that, by contrast, R&D tax relief applications are generally outsourced to third-party specialists). However, others found the idea of grants appealing as they would improve cash flow and reduce uncertainty, compared to making tax relief claims.

Overall, in considering the hypothetical scenario of receiving financial support by way of a grant or subsidy equal to their current amount of tax relief at the start of the financial year (ie, before undertaking any R&D), 56% of claimants stated that they would not change their level of R&D expenditure, but 39% reported that they would increase their R&D expenditure.

In addition to evaluating how much additional R&D expenditure is generated, the report also considered the indirect impacts of the scheme for claimants. Results indicate that claimants show a stronger performance than non-claimants on a range of indicators, including larger revenues and a higher proportion of turnover on innovative products or processes.

RDEC scheme

The report written by HMRC estimates that the RDEC stimulated between £5.8bn and £6.5bn of additional R&D expenditure in 2017/18 at a cost to the exchequer of £2.4bn (or between £2.42 and £2.70 for each £1 cost to the exchequer).

This suggests that the RDEC scheme is much more effective than the SME scheme in encouraging additional R&D expenditure.

The scope of the RDEC report did not cover any spillover benefits to the wider economy.

Patent Box

The report written by HMRC indicates a potential 10% increase in investment in the UK by companies that use the box compared to those that don’t, although it also suggests that it may take at least a year before the impacts of Patent Box use are fully translated into increased investment.

The report suggests that once more data is available, future reports might consider:

  • The effects of phasing in the policy;
  • The difference in effects before and after the 2016 changes to the patent box; and
  • The levels of skilled employment, or employment in general, as a possible outcome variable.

Read the reports in full:

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