Tax credits for companies doing research and development must be reformed to kick-start the economy and make the UK a more attractive place for investment after Brexit and Covid, industry leaders have warned.

Eight powerful trade bodies representing firms spanning the pharmaceuticals and tech industries to food and drink and aerospace have come together to urge Chancellor Rishi Sunak to change the rules in a bid to kick-start a wave of innovation.

The current “outdated” rules do not allow companies to claim R&D tax breaks on capital spending, such as on labs and buildings and machinery, unlike in other countries such as France, Spain and Japan.

A report commissioned by the industry bodies said: “In other words, there are far stronger incentives to physically locate new research facilities in other countries.”

Enhancing the R&D tax credit regime to include capital spending could create a strong incentive for companies to invest in Britain.

The change could add £4bn a year to the economy within a decade, according to the report, and create at least 12,000 jobs – mostly in high-skilled, high-wage manufacturing areas such as new medicines, robotics and clean energy. It would pay for itself in seven years, and produce a net gain for government coffers.

Richard Torbett, chief executive of the Association of British Pharmaceutical Industry (ABPI), said: “This report shows just how critical R&D will be to our recovery, but also how we do not have the incentives other countries do to attract more investment and job creation in the UK. We are calling on the Chancellor to reform tax credits and give a real kick-start to the recovery.”

The policy would also create new investment and jobs created in regions like the North and, the groups said, areas where the Government has committed to boosting employment and the economy. It would also help the government to meet its pledge to increase the country’s R&D spend to 2.4pc of GDP by 2027, from the existing level of 1.7pc.

Business R&D expenditure has increased by more than a third in the last decade, rising from £19bn in 2010 to £26bn in 2019. It now accounts for 8.3pc of all company spending, up from 5.2pc in 2010.

There are some tax benefits attached to R&D capital expenditure, but they treat loss-making and profit-making firms differently.

Profit-making businesses get back 19pc on R&D capital expenditure through the tax system, but loss-making ones get nothing back. This is important in the context of a pandemic-related economic downturn, the report argues, because many more firms are expected to make a loss.

Steve Hughes, the report’s author, said: “The move to include capital expenditure allowances in R&D tax credits would be very simple to implement, would make the UK a better place to invest in, would drive jobs and growth across the regions that most need levelling up, all for a policy that is self-financing. It should be adopted as an immediate priority.

“Of all the options the Chancellor has at his disposal to reboot the economy, this is the no-brainer. The UK cannot be the best place in the world for scientific research if incentives for investing in it are suboptimal compared to elsewhere.”

The report was put together by the ABPI; manufacturing body Make UK; space industry group UKSpace; TechUK; the Confederation of British Industry; The Food and Drink Federation; The Association of British HealthTech Industries; and ADS, which represents aerospace, defence, security and space companies.

(Source: Telegraph)