Proposal for R&D tax reform could create over 7,700 jobs

Posted on 7 Nov 2011 by The Manufacturer

Trade bodies have united to recommend that government reforms the current system of R&D tax credits, benefiting larger companies with tax losses, encouraging R&D investment and boosting jobs.

Increases in investment stemming from reforms to R&D tax credits could create 7,735 jobs and increase economic output by nearly £665m a year, according to a new report that explores the effects of modifying R&D tax relief to make it more attractive – especially to larger companies.

The reform hinges on treating tax relief for R&D as a credit against costs of production, which many companies have said is more attractive than the existing system of treating the relief ‘below the line’, on the profits of companies.

Doing so would encourage more firms to invest in R&D in the UK, because when deciding whether to proceed with R&D projects and where to locate them, companies say that cost is the predominant factor.

The report, which is due to be published tomorrow, says that current R&D tax relief has little or no value for large companies with tax losses, which account for roughly one quarter of R&D investment in the UK. Bringing the relief ‘above the line’ – where the tax credits can relieve both a company’s balance sheet and their profits – would be more beneficial to companies and will encourage R&D investment.

Thirty six companies, including Alstom Power UK, Bentley Motors, GKN, Jaguar Land Rover and pharmaceutical firm Lilly UK, provided concerted agreement on the effect of this reform on their decisions to invest in R&D in the UK.

The report is authored by manufacturers’ organisation EEF, the Society of Motor Manufacturers and Traders (SMMT) and accountancy firm PwC, who analysed the potential economic benefits of modifying where the tax relief is applied to companies.

Currently R&D relief can reduce a company’s tax bill, but relief can only be claimed if the company is liable for Corporation Tax. The EEF/SMMT report wants to address these limitations. The reform will particularly benefit larger companies who file tax losses, who will receive greater R&D tax relief under the proposed new system.

The report and the consultation papers will be submitted to government this week.

Should government implement the recommendations, the report’s authors claim the changes will create up to 7,735 jobs across industry, directly and indirectly, as well as increasing UK GDP by nearly £665 million per annum. The long term effect on the economic output could be increased in the order of £3.1bn over a period of 30-years.

EEF chief executive Terry Scuoler (pictured), argues that the reform would stimulate private sector and foreign investment and help support long term economic growth. He added: “Encouraging high value investment and innovation by UK-based companies as well as attracting foreign investment is crucial for ensuring UK manufacturing and the wider economy can continue to grow.”

Paul Everitt, chief executive of motor industry group SMMT, said “Automotive is Europe’s largest investor in R&D and the changes proposed will encourage companies to invest even more. Many countries are keen to secure high value R&D investment and it is essential the UK business environment remains globally competitive and attractive to international investors.”

In 2009, total expenditure on R&D in the UK was almost £26 billion having grown on average by nearly 3.4% per annum in the period 2005-09.

Business R&D expenditure was only 1.21% of GDP in 2008/9, less than several other Western
European countries including Finland (2.77%) and Germany (1.84%), as well as other economies such as Japan and the US (2%).