Australian government proposals to restrict tax incentives for R&D and innovation have been delayed following an outcry from business and research groups.
The proposals, intended to save £1.2bn, capped cash refunds for research activities at $4m, introduced a new ‘intensity test’ for larger companies to favour higher, more intensive R&D investment, and significantly increased compliance and enforcement measures, according to a report in the Guardian newspaper.
But business and lobby groups said the reforms would threaten economic growth by jeopardising innovation, and even encourage Australian businesses to move their non-R&D offshore.
Steve Phillips, CFO of UK-based R&D tax specialist GovGrant, said the Australian government’s proposals were “extraordinarily short-sighted.”
“The evidence that R&D tax credits bring economic benefits is overwhelming. In the UK, HMRC has calculated that each pound claimed in R&D tax credits generates additional GDP between £1.80 and £2.40, so governments should be doing more to incentivise innovation, not less. The government spends 0.6% of the total tax take on R&D tax credits, and delivers £8.1bn of R&D spend, yet the UK is still only mid-table when it comes to EU investment in innovation.”
He said the UK economy was starting to edge towards recession, with growth of just 0.2% in the last quarter of 2018, and confidence down across the whole of business, so he urged the Chancellor to build on the measures he announced in the Autumn Budget.
“We were pleased the Chancellor extended entrepreneurs relief from 12 months to two years last Autumn, and the increase of £1.6bn to support the UK’s industrial strategy and applying tax relief to stimulate investment in buying firms which are rich in inventions and IP were also good news.”
Looking ahead to the Spring Statement on 13 March, Steve urged the Chancellor to do more to enhance the tax credits available to businesses that innovate. “We’d like to see Mr Hammond widen the tax credits scheme to include new sectors like social sciences that are related to scientific and technological advancement.”
“We also want more help for small companies, for example where they are scaling up but the management opts not to draw market salaries. At present the government doesn’t allow for that: 20 people may be working very hard to build their SME and opt for a £10K salary, but they don’t get credit for it.”
Steve also urged the Chancellor to increase the value of the benefit for small companies and increase the enhancement rate from 130% - 150%. “A business should always benefit if it is undertaking R&D, regardless of tax position. If the relief only preserves losses, companies tend not to make a claim.”
He said, however, that “in a global marketplace, innovation policy must be one of continuous improvement over the long term. I suspect that that some innovation-minded businesses will have seen the fiscal smoke signals from the Australian government as a sign that they are not welcome. We must continue to roll out the welcome mat in the UK and make sure we are a destination of choice for innovative businesses the world over.”