Economists at the Organisation for Economic Cooperation and Development (OECD) have released a new report that assesses how effective tax breaks are at increasing research and development (R&D) activities.
The new study has found that for every euro that Belgium or Portugal offer in corporate R&D tax breaks, each nation gets more than €3 back in increased R&D spending. Scandinavian countries, such as Sweden, are not far behind, getting back just short of €3.
While tax reliefs are effective in these countries in others, such as France, the return on R&D tax breaks is far lower. In fact, the French government gets back just 34 cents in extra business R&D expenditures for each euro offered via its tax relief system – the lowest of all OECD nations.
Across the OECD as a whole, about 55 per cent of total public support for business R&D comes in the forms tax breaks, with the remainder provided via “direct” subsidies, such as grants or loans.
The OECD has said the reason behind the apparent success of some schemes but not others is complex. Analysis of the data tends to suggest that tax breaks are most effective in spurring small and medium-sized companies to invest, especially if they don’t already do significant R&D activities.
In comparison, tax schemes for larger businesses, where more R&D activity is already undertaken, are less effective.
The data shows that on average, across the 20 OECD countries studied, R&D tax incentives for SMEs were worth €1.4 of additional R&D activity from the industry for every euro they offer in lower taxes.
Another key finding of the report was that where a limit is set on the amount of tax relief available for each business it tended to encourage, rather than discourage more spending.
Finally, the study revealed that tax incentives are most effective at helping businesses to fund close-to-market, experimental development projects rather than early-stage basic or applied research, which was more effectively encouraged via grants and subsidies.
Patrick Child, deputy director-general for research and innovation at the European Commission, which co-funded the study, said governments “needed to become smarter than ever in using scientific evidence…to guide policy choices”.
The study did not look at the UK’s use of tax incentives, but the latest data shows that £5.1 billion of tax relief helped to fund £36.5 billion of R&D expenditure in 2017-18 – meaning the Government supports around £7.15 worth of spending for every £1 of support it makes available through R&D tax credits.
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