Innovators could get tax breaks to boost UK productivity

Research from London Business School is shaping Treasury policy as officials race to counter an expected downgrade in the UK’s growth outlook. Economists Paolo Surico and Joseba Martinez found that targeted corporate tax breaks can deliver productivity gains up to ten times their cost, evidence now influencing plans inside Rachel Reeves’s department.

The Treasury is examining options to boost productivity by offering tax breaks for innovators, as officials scramble to offset a likely revision from the Office for Budget Responsibility (OBR). The downgrade, prompted by weaker post-pandemic growth, could shave 0.1 to 0.2 percentage points from long-term forecasts, creating a shortfall of up to £20 billion for the chancellor to fill.

In response, Reeves has instructed officials to identify “pro-growth policies” that can be formally scored by the OBR. Among the leading proposals is an expansion of the “full expensing” regime for corporation tax, first introduced in 2023 by Jeremy Hunt. Currently, firms can deduct the entire cost of qualifying investments against their tax bill — for every £1 million spent, they can claim back £250,000.

Reeves is considering broadening this relief to include intellectual property and patent transactions, encouraging firms to develop and commercialise innovations more rapidly. Treasury modelling suggests the move would cost just under £1 billion but could generate as much as £10 billion in productivity gains over the next parliament, a scale consistent with the findings of the LBS research.

Chris Coghlan, the Liberal Democrat MP who has been pressing the Treasury to act on the LBS study, said the measure could meaningfully reduce the fiscal gap. “This could cut the chancellor’s £20 billion black hole by 20 per cent,” he said. “It’s a win-win, boosting UK startups, driving cutting-edge science and rewarding firms that innovate at pace.”

For the full article in The Times news paper, click here https://www.thetimes.com/uk/politics/article/treasury-tax-breaks-innovators-autumn-budget-j868xspl5