The party manifestos are out. But what do they mean for R&D Tax Credits and innovation funding in the UK? GrantTree investigates.
All of the UK’s major parties have released their manifestos. These dense documents outline each party’s plans and pledges for the country. All they have to do now is win the keys to Number 10 on December 12th.
GrantTree has conducted a thorough review of each manifesto, looking at how they propose to support British innovation. We paid particular attention to their attitudes towards R&D Tax Credits, the government’s primary scheme for stimulating research and development at startups, scaleups, and established businesses.
Here are our findings, and what we believe the outcome will be.
Naturally, these policies are one junction in complex webs of policies, principles, politics. How much impact they will have in this nuanced context remains to be seen. And of course, there remain the urgent, but all-too-familiar questions around Brexit. More on Brexit’s impact on R&D Tax Credits, here.
A quick note: to avoid bias, we’ve ordered the parties by the number of seats they’re expected to win, as predicted by YouGov’s recent MRP model.
Also, we’ve only analyzed manifestos of parties vying for seats nationwide. Parties competing exclusively in England, Scotland, Wales or Northern Ireland don’t feature.
The Conservative Manifesto – ‘Get Brexit Done. Unleash Britain’s Potential’
The Conservatives are promising to expand the R&D Tax Credits scheme. According to their manifesto, the Tories will “increase the tax credit rate to 13 per cent and review the definition of R&D so that important investments in cloud computing and data, which boost productivity and innovation, are also incentivised.”
The “tax credit rate” here refers to the RDEC scheme. R&D Tax Credits are divided into two ‘tiers’. Large companies are eligible for the RDEC scheme, and small and medium-sized companies for the SME scheme.
Here’s how the government defines small, medium, and large companies for R&D Tax Relief.
At present, companies applying to the RDEC scheme can reclaim up to 12% of their eligible R&D investment back in tax relief. That’s for work performed after January 1st, 2018. The Tories are planning on increasing this by 8%.
Note: Tax Relief given as part of the RDEC scheme is subject to corporation tax. So that’s 12% gross.
Small and Medium-sized companies, meanwhile, are eligible for the more generous SME scheme. They can claim back up to 33% of their R&D spending.
The Tories have also promised to review the definition of “research and development”, expanding the costs businesses can claim for. This updated definition is set to cover investments in cloud computing and data, which will benefit many software companies and could reverse previous clampdowns on software-based claims.
This news will be cheered by The Coalition for a Digital Economy. As Joel Gladwin, the organisation’s head of policy, wrote in The New Statesman: “tech startups are currently being denied the right to R&D Tax Credit rebates for a range of technologies that are vital to their innovations because of an outdated definition of what constitutes R&D.”
We agree. The definition of R&D should be expanded, particularly in a way that incorporates common and important investments in technology that will support growing businesses.
The Labour Manifesto – ‘It’s Time for Real Change’
Labour has promised more radical revision to the R&D Tax Credits scheme. These changes are outlined ‘Funding the Future’, a document explaining how a Labour government would finance its policy decisions.
In Funding the Future, AKA The Grey Book, Labour cite criticism of the R&D Tax Credits scheme from two political think tanks: The Institute for Innovation and Public Purpose (IIPP) and The Institute for Public Policy Research (IPPR).
The IPPR believes the scheme is overly generous to companies that are too large and profitable to have their R&D work subsidized. The IIPP says “Qualitative studies of the effectiveness of the R&D tax credit provide little evidence that it played a part in the decision to engage in R&D,” and believes that direct funding would be more “effective than tax credits.”
The Labour Party agrees with both critiques, and is proposing to “phase out R&D tax credits for large corporations” while “keeping the R&D tax relief SME scheme.” In other words, and as far as we can tell, Labour is planning to scrap RDEC.
Savings from this move would be redirected to Innovate UK, the agency responsible for grant-funding innovation in the UK, and “the National Investment Bank”.
According to HMRC’s annual R&D Tax Credits report, there were 7,285 RDEC claims between 2016 and 2017 (the latest period HMRC has figures for). That’s 14% of the number of claims filed but a substantial 42% of the tax credits paid out.
R&D Tax Credits are more beneficial to small and medium companies. But the RDEC scheme provides a valuable incentive for larger businesses. Additionally, more than £200 million in tax credits were paid out to SMEs who were required to claim through the RDEC scheme. So, eliminating the scheme altogether could unintentionally harm smaller companies that need tax credits to fuel growth.
The Liberal Democrats Manifesto – ‘Stop Brexit. Build a Brighter Future’
The Liberal Democrats’ manifesto promises to “support the growth of new jobs and businesses in the tech sector by allowing companies to claim R&D tax credits against the cost of purchasing datasets and cloud computing.” This policy would expand the tax credits scheme, benefitting many tech companies who are investing in data and cloud-based technology.
The Lib Dems are also promising to ‘simplify the regulatory landscape and speed up regulatory change’. Though it’s unclear what that means at this stage. And what impact it will have on innovation.
The Green Party Manifesto – ‘If Not Now, When?’
The Green Party’s manifesto doesn’t include any mention of the R&D Tax Credits scheme.
The Brexit Party’s…Document – ‘Contract With The People’
The Brexit Party put forward ‘A Contract With The People’, instead of a traditional manifesto. It also has no mention of R&D Tax Credits.
In less than two weeks we will know which of these manifestos will put in motion, and exactly how much of that manifesto becomes real policy.
As always, we at GrantTree believe that more innovation is a good thing. It can unleash Britain’s potential, bring about real change, help us build a brighter future, and empower us to tackle the environmental emergency now.
Whatever government comes into power has a responsibility to support UK startups, scaleups, and large businesses to develop the next generation of cutting-edge technologies.