Unlike the UK the US has a renewal timescale for its R&D Tax Credit scheme. What can we learn from this process? We can see that, because it comes up for renewal, they keep an eye on its effectiveness. And the outcome? It gets renewed every time.
The US Tax Credits regime has a regular renewal clause and, in late 2012, it was time for renewal during the so called ‘lame duck’ session between the presidential election and the inauguration. Earlier that year Michael Rashkin wrote in EE Times that “The R&D credit doesn’t work”and advocated its elimination. But many hoped Congress would ignore Rashkin’s advice. And it did.
The reason Rashkin’s words prick up ears on the subject in the US is that he was the author of Practical Guide to Research and Development Tax Incentives: Federal, State, and Foreign in 2004 – regarded by many as a definitive guide in what was then a confusing area. They have been spotted recently by Robert Atkinson of EETimes who discussed them in a recent editorial.
Listening to the three key pieces of evidence in favour of renewal delivers valuable lessons for British industry as the schemes rely on the same principles.
Tax Credits are not for specific product development
Rashkin claimed no company had claimed a product invention as a result for R&D Tax Credit. This shows a deep misunderstanding of the Credit’s purpose. It is designed to reward any and all of a company’s innovative efforts (in arrears) so encouraging greater efforts. It’s not like a grant which is generally for a specific project. No, for the benefits you must look elsewhere.
When R&T Tax Credits are available the Board can use this to foster an atmosphere of innovation. This will help to drive a company forwards to new products and new markets coupled with greater success.
It is an opportuntiy often missed by management. The funds are treated as an accouting issue, yet can be leveraged to a much greater depth through imaginative direction.
The Tax Credit multiplier
‘One dollar of Credit only garners one dollar of research’ Rashkin says. Where he gets this figure from perplexes most experts. There are several studies showing the true effect to be between 1.5 and 3.o times the Tax Credit’s value.
Tax Credits benefit wider society and wider industry
More importantly is the fact that the developments enabled by these Rand D tax credits also have a spillover as they, in turn, enable related companies (suppliers or others in the industry), to increase their R&D as well. This magnifier can multiply the effect up to four times the original value as all industry benefits.
In the UK the Tax Credit system operates in a very similar fashion and all these benefits will also accrue to those who are innovative and claim their due credits.
Are you getting yours?