Will the real R&D employees please stand up? Effects of tax breaks on firm level outcomes

The UK and many other countries offer generous tax treatment of expenditure for research and development; it is important to evaluate how beneficial this treatment is for stimulating greater R&D. This paper evaluates the effect of R&D tax incentives using a 2008 exogenous change in the threshold of small and medium-sized businesses from 250 to 500 employees. Firms that were subsequently registered as an SME were able to take advantage of more generous treatment of R&D; other firms were not affected, and serve as a control group. The results indicate that tax incentives do lead to increased R&D spending, with a 1% reduction in the cost of capital increasing R&D by 1.2%. Also, we find that the higher R&D spending is not due to companies relabeling other expenditure as R&D. Instead, R&D generated through the reform is more attributable to an increase in the number of R&D employees.

Irem Guceri. CBT Working Paper 16/02