Budget 2017: For a better tax treatment of innovation-related expenditures

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As Lee blogged yesterday, EEF budget submission has been released. This blog takes you through EEF’s recommendations on R&D and innovation policy. 

 

Innovation is front and centre of manufacturers’ actions to drive productivity. Our 2017 Executive survey showed that more than half of manufacturers will be investing in process innovation and new technologies in the year ahead. This will be achieved despite mounting risks to growth and the highly uncertain environment in the wake of Brexit.

Yet despite manufacturers’ taking actions to innovate, the gap between the UK and its main partners in terms of research and innovation is still important. Gross expenditure on R&D totalled 1.73% of UK GDP in 2012, well below the OECD average of 2.4%. Business innovation is low by international standards and has been subdued since the outbreak of the financial crisis, dragging on productivity performance.

Government action in recent years to invest in the science base ensured the UK has one of the most attractive and best performing research systems in the world. Nevertheless the proportion of resources devoted to supporting the broad spectrum of innovation needed to drive future growth remains underweight. As a result, firms’ investment on innovation, especially on non-R&D expenditure, is severely lower than that of our main competitors and weighs on the UK’s overall innovation performance.

EU-innovation-scoreboard-2

This trend is unlikely to be reversed without a significant commitment from the government. Indeed, innovation remains the second most challenging action to deliver for manufacturers going into 2017.

The R&D tax environment is one of the levers on which policymakers could act to reverse this trend. In the forthcoming budget, the Chancellor could seize the opportunity to make the tax environment more attractive. Manufacturers are already the biggest claimers of the credit and have benefited from previous incremental improvements. There is still lots of scope to use the credit to bring forward additional innovation investment from businesses.

For this purpose, policy actions could include:

  1. Broadening the scope for qualifying expenditure under the R&D tax relief scheme for SMEs. This could include: (i) softening the strictness of the novelty requirement for qualifying R&D; (ii) shifting from a focus on technological or scientific achievement to include organisational achievement.
  2. Increasing the generosity of the R&D tax credit under the Large Companies scheme. 

 

 The full list of our recommendations is available here
We’ll be listening out to see what the Chancellor announces on Wednesday 8th March. Check back our blog to have an insight on the key points from the Budget and the OBR forecasts.

 

 

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Economist

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