UK R&D tax incentives offer untapped potential

Since the global financial crisis, the UK has experienced a sustained stagnation in productivity growth, lagging behind the majority of its G7 counterparts. Growth in productivity is vital to an economy as it leads to more sustainable growth, better living standards and increased global competitiveness.

The UK lagging behind

Business investment is a key enabler of productivity growth. But, as shown in the CBI’s Catching the Peloton report, the UK has sat at the bottom of the G7 table for business investment since 2001. This weakness in business investment is limiting the UK’s ability to reach productivity growth rates observed prior to the financial crisis. The government adopted a number of recommendations from our report at last year’s Budget, including the introduction of the Structures and Buildings Allowances and temporarily increasing the Annual Investment Allowance.

Tap into the potential

One further area with huge potential, is research and development (R&D), which is the focus of recently published CBI Report ‘Untapped Investment’. As an enabler of productivity, investment in R&D brings with it enormous benefits to economic growth both now and in the future. The last government recognised this by committing to a target for R&D spending to reach 2.4% of GDP by 2027 and 3% in the long-term, something the CBI had long called for. But it also must acknowledge that at the current pace of R&D investment, the UK is estimated to miss this target by £19bn, and risks missing out on the enormous benefits R&D can realise. The upcoming Spending Review, provides a critical opportunity to scale up government expenditure to reach that target.

But a second vital area, where government action can move the dial to reach that target is the R&D tax incentive regime. To remain internationally competitive, it is critical for the UK’s R&D tax credit to keep pace with these modern practices and to policy changes elsewhere. This will guarantee the UK will secure private sector R&D investment and its associated benefits. To realise this, the CBI is calling on the government to:

• Widen the scope of eligibility for the R&D tax credit to ensure it keeps pace with modern R&D practices
• Review the availability of data on R&D expenditure to ensure the effectiveness of the R&D tax credit continues to be monitored appropriately
• Ensure the R&D tax credit is internationally recognised as world-class by regularly benchmarking the UK’s regime against international peers.

The Autumn Budget is the opportunity to deliver these measures to encourage greater business investment. You can read the full report here.

Please get in contact with Matthew Lewis for further information on the CBI’s future R&D tax credit work.