Wednesday, 20 May 2015

The futility of R&D tax credits.

From the official government statistics on R&D tax credits:

- The total amount of [R&D tax credits paid or credited to companies] rose to £1.4 bn – an increase of £150m from the previous year. The cost of support for the SME scheme rose by £170m from £430m to £600m, while the cost of the large company scheme declined by £20m from £790m to £770m.

- The total R&D expenditure against which claims were made amounted to £13.2bn in
2012‐13, an increase of 10% from the previous year.


1. The maths of the claims is tortuous, but you can easily express the value of the subsidy/refund as 10.6% of total cost/spend - £1.4 bn divided by £13.2 bn.

2. I know from experience that approx. 90% of all the R&D expenditure for which the subsidy is claimed are the wages and salaries of people carrying out the research.

3. The UK has a stupid extra tax on wages and salaries called "Employer's National Insurance contributions" of 13.8% on top of wages and salaries and this is included in the costs for which companies receive a subsidy.

4. So here's a thought - assuming that such micro-meddling is a good idea in the first place - just exempt researchers' wages and salaries from Employer's National Insurance - the net cost after tax/subsidy would remain much the same, with a modest cash flow/timing advantage to the companies concerned.

Maths lesson:

Current rules
Total R&D spend/claim £100.
Includes £10 other costs and £90 of wages and salaries incl. NIC.
That £90 = net wages and salaries of £79.09 plus £10.91 Employer's NIC.
Refund average 10.6% of £100 = £10.60.
Net cost of R&D = £89.40

Simplified system
Net wages and salaries, NIC-exempt £79.09
Other costs £10
Total R&D cost = £89.09.

I realise that my 90% is just a guesstimate and that the first few thousand pounds of a person's wages and salaries are NI-exempt, but let's not get bogged down in details.

5 comments:

Lola said...

Or, even better, you scrap all of the IT, NIC, R&D Credits, etc etc and simplify the whole system around one simple tax on the...

Mark Wadsworth said...

L, yes obviously:-) but one step at a time

Bayard said...

Just get rid of bloody national insurance. Why have two separate taxes on labour?

Oh, wait, it's so that salt-of-the-earth landlords don't have to pay one of them, but grubby businessmen do, isn't it?

Mark Wadsworth said...

B, yes, obviously.

But the politicians have persuaded a lot of people that "National Insurance pays for your old age pension".

Some people say we can't replace NI with LVT because that means there wouldn't be any old age pensions any more.

These people are terminally stupid, but faced with that level of stupidity, why would any politician want to reduce NIC? You'd lose the votes of all the stupid people.

See also VAT: a "tax on consumption".

Bayard said...

"These people are terminally stupid, but faced with that level of stupidity, why would any politician want to reduce NIC?"

Reminds me of a book title by Ross Thomas, "All The Fools In Town Are On Our Side". Cracking read, BTW.