How effective are tax credits for research and development?
R&D tax credits have become increasingly popular around the world in the recent years. Many countries adopted R&D tax incentive schemes in the past decade, while the generosity of existing schemes increased substantially. A pressing question now is whether these policies are effective in generating private R&D that would otherwise not have taken place. The difficulty in finding exogenous variation in the tax price of R&D complicates any policy evaluation exercise, even when suitable data at the company level on the value of tax breaks and R&D spending is available. In this study, we exploit variation in the tax price of R&D between firms and over time arising from policy changes that took place in the UK in 2008 to identify the impact of the UK R&D Tax Relief. Our study uses a rich company-level dataset on beneficiary firms and their qualifying R&D spending in HMRC’s corporation tax returns. We find that the UK R&D tax credits were successful in generating R&D spending which would have otherwise not been carried out. In response to a one percent drop in the tax price of R&D, we find that UK companies increased their qualifying R&D spending by about two percent. We also find that the early announcement of the policy changes affect companies’ strategies in shifting R&D spending to later periods when such spending becomes cheaper, but our results about the additional effect of the policy hold even when such strategic timing effects are taken into consideration.
Irem Guceri and Li Liu