Why has the Government Handed out Billions in R&D Tax Credits?

Innovation growth

The UK Government introduced research and development tax credits in the year 2000. Since then British businesses have benefitted to the tune of more than £11.4 billion.

Successive Governments have demonstrated their commitment to encouraging business innovation through R&D tax credits, as indicated by an average 18% year-on-year increase in claims by SMEs (small and medium-sized enterprises) between 2000 and 2013/15.

Even with the financial crash of 2008 and the period of austerity and belt-tightening that has followed, the Government has continued to reward businesses that invest in innovation.

With the nation’s public finances stretched and the Government committed to reducing the budget deficit, why are billions of pounds still being spent on research and development credit?

The simple answer is that research and development drives innovation, and innovation provides economic growth, goods, and services.

Any business that develops a successful innovation is likely to reap the rewards, but these benefits spill over to the advantage of society as a whole.

What has innovation ever given for us?

Longer Lives: The average life expectancy in Great Britain at the end of the nineteenth century was around 47 years for men and 50 for women. A little over a century later and those figures have climbed to about 79 and 83 respectively.

Medical innovations1 mean that we now live in a country where deaths from infectious diseases such as tuberculosis are rare, antibiotics prevent minor injuries from proving fatal, and infant mortality has been cut from more than one-in-ten in 1900 to 0.38% today.

Economic Growth: Numerous studies have linked innovation with driving an increase in GDP.2

World GDP per capita has skyrocketed since the industrial revolution. Innovations such as the production line mean that it has been possible to accomplish this hand-in-hand with improved working conditions and reduced working hours.

Quality of Life: On almost any meaningful measure that can be conceived of, life is better for the average person today than it was one-hundred or two-hundred years ago.

Thousands of innovative products have been developed that have revolutionised the ways we live, work, communicate, travel, and spend our leisure time.

Innovation has driven a significant improvement in quality of life, and an ongoing investment in research and development should help to ensure this trend continues.

Jobs: Innovation can be seen as something of a double-edged sword when it comes to jobs. New technologies have wiped out jobs and industries in the past; they will do so again in the future.

Innovations are inherently destructive, but it is a form of creative destruction. Studies have shown that new inventions have generated far more jobs3 than they have destroyed.

Fifty years ago many of the jobs that exist now would have been impossible to even conceive of. In another fifty years from now innovations will have opened up new markets and jobs that nobody has yet imagined.

Innovation for the future.

Mankind has made astonishing progress within the space of just a few generations, but it may well be that the most difficult challenges are yet to be overcome.

Innovation will play a vital role as we look to take advantage of clean, renewable energy sources, provide enough food for a growing population, tackle poverty at home and abroad, and combat the growing threat posed by climate change.

It would be unrealistic to expect new technologies to solve all of our problems, but science is the key that will help to unlock a lot of the doors that stand in our way.

How innovative is the United Kingdom?

Great Britain has been a world leader in innovation since 1760 when it gave birth to the industrial revolution that transformed the world. Some experts believe we are now seeing the beginnings of a new industrial revolution4, a revolution that will see advanced technologies blur the lines between the physical and digital world.

If Britain is to remain a successful, prosperous country, then it is vital that we strive to be at the forefront of innovation and continue to push against the boundaries of what is possible.

Fortunately, Britain’s businesses and research sectors are recognised as being amongst the most innovative in the world.

The Global Innovation Index ranks the nations of the world for their success in innovation, as defined by 79 different indicators. In the most recent report, released in 2015, the United Kingdom places a highly impressive second out of the 141 nations assessed.


1 – http://abcnews.go.com/Health/TenWays/story?id=3605442&page=1

2 – http://www.oecd.org/science/inno/39374789.pdf

3 – https://www.theguardian.com/business/2015/aug/17/technology-created-more-jobs-than-destroyed-140-years-data-census

4 – https://www.theguardian.com/business/economics-blog/2016/jan/24/4th-industrial-revolution-brings-promise-and-peril-for-humanity-technology-davos

5 – https://www.globalinnovationindex.org/content/page/GII-Home