Tax credits: does Wales need an R&D injection?

Should Wales take control of R&D tax credits to boost the economy? Nisreen Mansour outlines the potential in the seventh of our blog posts considering new devolved taxes for Wales.

R&D is one of those buzz terms frequently referred to during discussions about strengthening our economy, and are an activity which politicians are usually stumbling over themselves to support.

R&D tax credits are already awarded by HMRC to both SMEs (from 2000-1) and larger companies (from 2002-3). They are a ‘credit’ based on a businesses’ corporation tax eligibility, therefore companies which are not required to pay corporation tax are not entitled to R&D tax credits.

R&D investment in Wales is in desperate need of further stimulus. Spending in Wales has been the lowest per head out of all UK nations (a title we’ve held since 2008), and more than twice as much is spent per head in England.

We think there’s a definite case for R&D tax credits to be devolved. Of course, there are obvious hurdles – corporation tax is not devolved to Wales and there are no plans for this (yet). But what if the National Assembly for Wales were to take over the reins of R&D? What if they offered to buy up a big bundle of R&D tax credits to allocate as they wish? This would enable closer policy alignment as it relates to devolved responsibilities such as business and higher education, and more targeted investment to suit Wales.

What would Welsh R&D tax credits look like?

Those seeking to benefit from the tax credits would be required to declare how their business invested in R&D in Wales during the past financial year, so a definition or descriptor of qualifying R&D investment would be needed.

The current UK definition states that an R&D project must “seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainly.” A Welsh interpretation could go further, perhaps mentioning something specifically about skills investment or collaboration with Welsh universities.

Such a definition would be both useful and necessary for devolved R&D tax credits, but it could also be expanded to encourage investment in particular areas of the economy or in particular circumstances, such as the involvement of apprentices. Further objectives could also be attached to R&D tax credits, such as the requirement to show how it will achieve positive social, environmental or health ends or the requirement for applicants to operate in such a way that is not detrimental to the communities they are based in (i.e. in relation to equality and environmental harms, for example).

But do R&D tax credits work?

Simply put, yes. A recent report by HMRC estimated that for every pound spent on R&D tax credits, it stimulates between £1.53 and £2.35 additional expenditure by UK companies. It also found that there were over 100,000 R&D tax credits awards granted since the scheme was introduce, and that in 2012-13, the tax credits supported investment worth £13.2 billion.

Expanding support

This policy would seek to achieve two objectives. It would encourage investment in R&D by expanding the availability of support available for this and targeting it at those businesses in Wales which are most likely to benefit. Devolving them would enable policy makers to tailor the  offering to Wales’ businesses and higher education institutions.

Policy alignment

R&D tax credits would also enable the National Assembly for Wales and the Welsh Government to more closely align investment in R&D with its other policies for the economy and labour market. As well as stimulating indigenous growth it could attract businesses to locate in Wales, with the associated advantages this would bring.

The arguably slow-pace of financial devolution to Wales compared to other areas of responsibility means that there certain policy areas where the National Assembly for Wales is restricted in the changes it can drive through. R&D is an excellent example of this. While so many areas related to research and development are devolved – such as business, higher education, and skills – the big financial levers remain in the hands of Westminster.

Giving Wales the power to distribute R&D tax credits will not only result in better alignment, but also the ability to correct a policy which appears to be working well for England (and, to some extent, the other devolved nations) but is not going far enough to bring Wales up to speed with the rest of the UK. While it will be a complex deal to bargain, it seems like a step in the right direction if we want to stimulate R&D investment and employment in Wales.

Nisreen Mansour is Policy and Research Officer at the Bevan Foundation. For more information about our work on new devolved taxes for Wales please click here.