Firms that benefitted from a UK tax relief scheme introduced in 2002 increased their spending on research and development (R&D) by 20%. That is the central finding of research by Irem Guceri, presented at the Royal Economic Society''s 2014 annual conference. Her study also suggests that the positive impact was felt in both high and low technology sectors of the economy.
In 2000, the UK government offered R&D tax relief to small and medium-sized enterprises (SMEs); for every £100 spent on R&D, SMEs could deduct £150 in the calculation of their taxable profits. In 2002, a similar scheme of 125% relief was launched for large companies.
The research analyses the BERD survey, which takes data from the Office for National Statistics on all the businesses that undertook R&D activities over the period 1998-2006 to investigate the effect the tax relief schemes had on R&D. She comments:
''My study finds that at least for medium-sized companies, the tax incentive worked to generate additional R&D by the private sector.
''Given an appropriate research design and data availability, now the more pressing question is whether the same holds for the largest companies, which are responsible for a major part of the total private R&D spending.''
Examining the impact of the 2002 UK reform that introduced the Large Company R&D Tax Relief, the study finds that those firms that started benefiting from the policy in 2002 increased their spending in R&D by about 20%.
The research uses the Business Enterprise Research and Development Database, which is provided by the Office for National Statistics (the BERD Survey) on all the enterprises that undertook R&D activities over the period 1998-2006.
The result does not seem to suggest that there is any sectoral heterogeneity, meaning that the 20% additionality effect of the policy holds for both the high technology and lower technology sectors.
The UK government has been expanding its support for innovative activity by businesses since the early 2000s. The small and medium sized enterprise (SME) R&D Tax Relief started to be implemented in 2000 with a rate of relief amounting to 150% of eligible expenses. This means that for every £100 spent on R&D, firms could deduct £150 in the calculation of their taxable profits.
In 2002, the Large Company Tax Relief was introduced, for all the other firms that were not previously eligible for any tax incentives for R&D. The rate of relief for large companies was 125% in 2002, and then in 2008 this rate was raised to 130%.
In 2008, the SME rate of relief was also raised; first to 175%, which then increased further to 200% in 2011 and 225% in 2012.
The 2011 Budget confirmed the introduction of the ''Patent Box'' policy, which grants a ''reduced 10% rate of corporate tax for pro?ts arising from patents''. In 2013, additional incentives have been introduced for the large companies.
The cost of the R&D Tax Relief schemes to the Exchequer is about £1 billion in forgone corporation tax revenues per year (excluding the Patent Box).
A key question now is whether the response of private R&D to the changes in its tax price is high enough for these enhanced tax incentives to generate the desired level of R&D expenditures by the private sector.
This study finds that at least for medium-sized companies, the tax incentive worked to generate additional R&D by the private sector. Given an appropriate research design and data availability, now the more pressing question is whether the same holds for the largest companies, which are responsible for a major part of the total private R&D spending.
''Tax Incentives and R&D: An evaluation of the 2002 UK reform'' by Irem Guceri, University of Oxford
