Tax reformation

Posted on 4 Dec 2011 by Tim Brown

EEF and SMMT have united to put forward recommendations for R&D tax credit reforms which should make investment in the UK more attractive to large multinationals and put Britain on a competitive footing as a research location.

The two trade bodies commissioned PriceWaterhouseCoopers to undertake a study of the current system for R&D tax credits and identify ways in which it could be reformed to make the benefits more obvious to those holding research budgets in large companies.

EEF and SMMT both expressed the hope that government would recognise the report, R&D tax reform – an economic study, in the late November Autumn Statement. If the recommendations are taken up by government, PwC predicts significant increases in jobs and investment. Unusually for such reports PwC have also calculated the projected cost to government in implementing the suggested changes. This cost is estimated at a conservative £200m a sum which Dairmuid MacDougall, partner at PwC and author of the report, identified as “relatively speaking, a small sum.” Mr MacDougall acknowledged the pressures of the recession on cost but said he believed the suggested changes represented “value for money for government.”

Paul Everitt, SMMT Chief Executive
Paul Everitt, SMMT Chief Executive

The new research comes as EEF and SMMT identified that Britain’s tax relief scheme for attracting R&D has fallen behind global competitors. Even France, not traditionally considered a front runner as an industrial research location in Europe, has recently implemented changes which have advanced its R&D status. Paul Everitt, CEO of SMMT said “Some of those involved in supporting the research for this report told us plainly that, if the situation does not change in the UK, they would consider relocating their R&D to France now that its system has been improved.”

The suggested UK reforms hinge 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. In effect this would mean the relief would work more in the manner of a grant, making it immediately palpable to R&D departments and to budget holders. According to those supporting the SMMT-EEF report, cost is the dominant factor in deciding R&D locations.

In addition to making the benefits of tax relief for R&D more obvious to key stakeholder the act of raising the benefit ‘above the line’ will also open up tax relief benefits to companies with tax losses. This group are currently excluded from claiming tax credits but account for roughly one quarter of R&D investment in the UK.

Thirty six companies, including Alstom Power UK, Bentley Motors, GKN, Jaguar Land Rover and pharmaceutical firm Lilly UK, contributed to the report. In the wake of its release a spokesperson from Lilly said: “An above the line R&D tax credit would be a very important and positive change for our business, encouraging us to make further investments here. It would also provide a clear and logical link between R&D expenditure and the associated tax incentive, resulting in appropriate transparency of cost in investment decisions.”

In 2009-10 Lilly invested £130 million into R&D within the UK making it the seventh largest British investor in the pharmaceutical sector. Lilly’s spokesperson confirmed: “Our Surrey R&D facility remains Lilly’s largest outside the US.”

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 an increase in the order of £3.1bn over a period of 30-years.

EEF and SMMT were keen to emphasize the criticality of retaining R&D investment from large multinational firms and of attracting large firm which are currently investing elsewhere, if government targets for growth and rebalance are to be met.

Mr Everitt commented on his sector’s role in R&D saying, “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.”

Speaking more broadly Terry Scuoler, EEF chief executive was clarified that the proposed reforms are not only designed to benefit automotive manufacturers. He particularly highlighted life sciences as being a strategically important development area for the UK.