Modelling the Economic Impact of R&D Tax Credits

//Modelling the Economic Impact of R&D Tax Credits
Modelling the Economic Impact of R&D Tax Credits 2015-07-20T09:57:03+00:00


Oxford Economics was commissioned by DETI on behalf of the Economic Advisory Group (EAG) to model the impact of enhanced R&D tax credits in Northern Ireland. R&D tax credits have been an element of UK R&D policy since 2000 and support for enhanced tax credits in NI have almost as long a history. In particular the Milford group of business interests in NI has long promoted enhanced tax credits as an important means of regenerating and rebalancing the NI economy.

As a response to this and similar calls, DETI promoted a study of the impact of tax credits. This was undertaken by Professor Richard Harris at Glasgow University in association with others at QUB . The report produced in 2006 judged that enhanced tax credits would have a positive although limited impact on productivity and might not represent good value for money from an Exchequer point of view. In this study the Oxford Economics NI tax model has been adapted to quantify the impact of tax credits within a realistic and up to date setting with updated estimates of the sectoral stocks of R&D in NI and expected changes in UK corporation tax rates. The model uses elasticities estimated by Harris et al to link tax relief to changes in business expenditure on R&D (BERD) and then to the stock of R&D knowledge. Changes in the stock of R&D are linked the productivity using sectoral elasticites from Harris et al.

Increases in GVA due to higher R&D are fed through the wider model to calculate the reaction of firms directly involved in R&D and also the impact on the wider economy through spending multipliers and tax changes. The net impact on public finances is calculated to assess value for money from the government’s point of view.

Estimates are included for the additional jobs and GVA involved in undertaking the additional R&D predicted in the model, and these also have knock-on impacts to the wider economy.Two scenarios are estimated. The central scenario estimates the impact of raising R&D tax credits from 130% to 250% for large firms and from 175% to 300% for small firms (employing less than 500 people). This is done within the UK context for corporation tax in which CT rates will fall to 23% by 2014. A second scenario estimates the impact of the same R&D tax credit rates but within a NI context in which corporation tax rates are reduced to 12.5% in 2012. This latter scenario investigates whether it would worthwhile adding an enhanced tax credit policy on top of a low corporation tax regime. These scenarios envisage a higher rate of tax credit in Northern Ireland than would be the case in GB.

Download the report