Reforming the R&D tax credit (again)? Questions need to be answered first.

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Last week the IPPR published a paper where they discussed reforming innovation support by reducing the R&D tax credit for large companies and channelling the money into applied research centres instead. These applied research centres would be a souped-up version of the newly introduced Catapult centres.

While we agree with the IPPR that the network of Catapult centres could do with a boost to their funding, we would question whether reducing the R&D tax credit was the best way to reallocate funding. In fact, there are a number of questions that would need to be answered first:

Can the UK compete internationally with a lower R&D tax credit?

The R&D tax credit is an important signal for the competitiveness of a tax regime and the government's wider support of innovation. Although tax will never be the main reason a company choses to locate in the UK, the right support can make a difference, but the R&D tax credit needs to be at a level that gets above the noise of all the other incentives available.

A response to this might be that there are other countries – including Germany – which do not have an R&D tax credit, but their grants system is much larger and simpler than that in the UK. In addition, the Germans are considering introducing an R&D tax credit.

Does policy risk being too prescriptive about the kind of R&D activities companies can claim for? There is criticism in the report that some of the money spent on R&D Tax Credit goes towards activity that might not fit with a traditional view of research and development. True, city firms – which are hardly flavour of the month – may have used R&D tax credit to support the development of software, which now seems to have added little value to the economy. But this doesn't necessarily mean support for this kind of innovation should be removed wholesale.

Developing new software can be an important part of process innovation. In fact I spoke to a manufacturer just last week who had used custom-designed software to speed up production of his largely-bespoke products, which was enabling him to reduce lead-times, increase margins and better meet his customers' needs.

Should we really keep on chopping and changing the support system?

One of the problems companies face when it comes to accessing innovation support is that the grants and application processes change regularly. The R&D tax credit is well-known and well-understood, and many companies see it as an important support mechanism.


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