The government recently released reports detailing the benefits of the RDEC and SME schemes to the broader UK economy. The reports were independently generated and were part of the government’s commitment to auditing its state-aid policies.
In all, they demonstrate a significant benefit both to the firms undertaking the R&D, but also to neighbouring firms and the broader UK economy.
We’ve summarised our four key takeaways from the reports below:
The Schemes Stimulate Additional R&D From Claimants
The most important figure reported is the “Additionality Ratio”. This is the amount of R&D expenditure generated for the amount of tax foregone. A ratio of 1 would indicate that the scheme generates proportionally the same amount of R&D as tax it foregoes.
The Additionality Ratio for the two schemes combined is approximately 1.72, meaning that for every £1 of tax foregone by the exchequer, £1.72 of extra R&D spend is generated in the economy. That’s split between the 1.02 ratio for the SME scheme and 2.55 ratio for the RDEC scheme.
Greater Innovation Amongst SME Claimants
The SME report goes into more detail about the benefits of the scheme beyond the “Additionality Ratio”. One metric they looked at was the number of patents filed by claimants of the scheme. The data shows that after businesses claim the SME R&D tax credit, they filed significantly more patents:
This is perhaps unsurprising given that claimants are likely to make their first claim once they’ve invested significantly in R&D, and are therefore in a better position to file a patent for their innovation. However, it does at least hint at the possibility of a causal relationship between the scheme and the number of patents filed.
Increases the Commercial Success of R&D Projects
The report also provides a useful qualitative comparison between firms that undertake R&D without claiming the credit and those that do claim the credit.
One of the key findings of that analysis was that the commercial success of the R&D was significantly higher for those that claimed the SME credit.
With R&D projects being 21% more likely to be a commercial success after claiming, this only adds to the view that claiming the SME credit is essential for any business undertaking R&D.
Regional Benefits of R&D
The report also highlighted how R&D benefits not only the firm that undertakes the work, but firms located near to it geographically. This “regional spillover” impact is shown to be statistically significant. The report indicates that for every 1% increase in R&D by a firm, the real turnover of adjacent firms increases by 0.05%. The absolute numbers sound small, but take the example whereby Business A doubles its R&D budget, then neighbouring Business B will experience a 5% increase in its turnover the following year without changing its own R&D budget.