The UK’s annual £7.3bn research and development (R&D) tax credit scheme is failing to stimulate significant business spending, according to a report from the Centre for Business Research at the University of Cambridge Judge Business School.

Aggregate business expenditure on R&D in the UK, as a percentage of national income and net of subsidies, is estimated to be 10–15% lower than before the R&D tax credits were introduced in 2000. 

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The report, published on May 25th, also questioned the UK government’s claims that every £1 of R&D tax credits generates between £1.40 and £1.70 of additional R&D spending.

“The theory behind R&D tax credits, namely that a reduction in the cost of R&D will lead to an additional increase in a company’s R&D expenditure, is flawed,” the report’s author David Connell wrote.

Former UK business secretary Greg Clark wrote in a foreword to the study that this “makes a powerful case for looking again at R&D tax credits and the patent box”. 

The £1.1bn-per-year patent box scheme offers a lower corporation tax rate of 10% to encourage the commercialisation of intellectual property. Despite difficulty in assessing its impact, the report claims 92% of the scheme goes to large companies, with UK business spending on R&D overseas roughly doubling since it was established in 2013.

“The evidence suggests that multinational companies can benefit significantly without a commensurate investment in the UK, with the UK subsidiaries of some foreign multinationals receiving subsidies of up to £50k a year per employee,” the report notes.

UK’s costly scheme

In 2019, the UK’s overall spending on R&D, which includes both the public and private sector, stood at 1.76% — up only marginally from 1.62% in 2000 and below the OECD average of 2.48%.

The report claims that industry lobbyists have long argued that the UK must have a competitive R&D incentive scheme to attract and retain investment. However, many other countries that the report claims should be role models for UK policy — including Germany, Sweden, Switzerland, Finland and Israel — make little or no use of R&D tax credits.

In 2017/2018 only the French government spent more on R&D tax incentives as a percentage of gross domestic product (GDP) than the UK, according to OECD figures.

While private-sector R&D spending lags in the UK, as a proportion of GDP, compared with other advanced economies, the country has historically been a favoured destination to set up R&D operations. 

Figures from greenfield investment tracker fDi Markets indicate that the UK has attracted the fourth-highest number of foreign R&D projects globally, behind India, China and the US.

But the report also contends that the UK must do more to grow and retain science and technology companies that are too often acquired by foreign multinationals.

“If we are to grow more companies like Arm and Dyson, we need to find ways of giving more entrepreneurs the opportunity to retain control over their businesses in the long term,” argues Mr Connell, referring to the UK's successful chip designer and household appliances manufacturer.

The report stresses that achieving the UK government’s target of 2.4% of GDP being invested in R&D “will require radical new thinking”. This includes the abolition of some elements of the R&D tax credits and patent box schemes and new policies to support small and medium-sized enterprises, and start-ups.