Industry associations in the UK are calling on the British government to introduce tax credits to drive an increase in R&D investment and boost job creation here.

Based on a report commissioned by the Engineering Employers’ Federation (EEF) and the Society of Motor Manufacturers and Traders (SMMT), the two associations want the government to create a truly internationally competitive R&D tax credit regime, by strengthening the link between the credit and R&D investment decisions, removing the link with corporation tax in favour of an ‘above the line’ credit.

The change would incentivise major private sector and foreign investment in UK manufacturing, create high-value jobs, support government’s move to rebalance the economy, enhance the UK’s global competitiveness and drive economic growth.

The report, prepared by PricewaterhouseCoopers, involved discussions with over 30 key UK R&D investors across a range of business sectors. Based on the findings, EEF and SMMT want the introduction of a cash benefit or redeemable credit at the point R&D costs arise, rather than providing a relatively opaque offset against corporation tax payments.

The change would provide a stronger incentive for the UK’s biggest R&D spenders to increase investments here and attract new foreign investment to the UK.

The report estimates that the change could increase R&D investment in the UK by nearly GBP390m (US$625m) a year and increase economic output by GBP665m ($1bn) in the short-term.

Terry Scuoler, EEF chief executive, said: “Measures to boost growth have to be the government’s number one priority given the weak state of the UK economy. Encouraging high value investment and innovation by UK-based companies as well as attracting foreign investment is crucial for ensuring UK manufacturing and the wider economy can continue to grow.”

SMMT chief executive Paul Everitt, added: “Automotive is Europe’s largest investor in R&D and the changes proposed will encourage companies to invest even more. Many countries are keen to secure high value R&D investment and it is essential the UK business environment remains globally competitive and attractive to international investors.”

The UK’s current R&D tax credit system is linked to corporation tax payments. Non-profit making companies, typical throughout the manufacturing sector, have no immediate incentive to sustain or increase their R&D activities. The current regime does not work for many large companies and is not competitive with international schemes.

Based on the findings of the PwC report, EEF and SMMT want changes to the current regime for large companies to make the R&D tax relief effective, certain and highly visible to investors whatever their UK corporation tax position is. 

They also want ‘above the line’ credit to count as a direct cost relief against R&D spend in the UK in the planning phase, resulting in a tangible reduction in R&D costs for projects.

The associations said that the certainty and immediacy of the benefit, and its visibility, would support spending on funding during the innovation phases of the investment and business cycles, supporting cyclical industries such as automotive and increase the attractiveness of the UK to foreign HQs deciding where to locate R&D spend.