UK R&D tax incentives need overhaul to improve effectiveness, study concludes

By Doug Connolly, MNE Tax

The UK’s research and development (R&D) tax incentive policies have generated a poor return in terms of increased R&D investments, but there are ways to make the incentives more effective while saving taxpayer money, according to a study published this month from the University of Cambridge Centre for Business Research.

While the UK government in March launched a review of its R&D tax incentives with an aim to increase R&D to 2.4% of UK GDP by 2027, the study authors suggest that reaching that target will require “radical new thinking” and the adoption of new policies such as the ones that they propose.

One improvement, the study says, would be to restrict R&D tax credits to spending that takes place in the UK. Unlike many countries, the UK allows credits for R&D spending overseas. The study finds that this allowance for claims for overseas spending is costly to the government and taxpayers and fails to keep the focus on encouraging R&D within the UK.

Another suggestion from the study is to end R&D subsidies for the financial sector. The study asserts that the financial sector in the UK is already strong and that research activity in the financial sector tends to be relatively low risk and does not suffer from a shortage of funding.

The study also finds that the UK R&D regime fails to adequately encourage new ventures, because the credit is neither linked to the increase in R&D spending like the US credit nor does it include any other preference for new ventures. In this respect, the study authors suggest reducing the general credit rate from 13% to 11% and using the savings for increased support for new R&D ventures.

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Doug Connolly

Editor-in-Chief at MNE Tax

Doug Connolly is Editor-in-Chief of MNE Tax. He has more than 10 years of experience covering tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from American University Washington College of Law.

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