Include SHAPE subjects in UK’s definition of R&D to unlock economy’s full potential, urges new study

By excluding humanities and social science related research and development (R&D) from tax credit programmes, the UK risks ignoring the full value of R&D in the nation’s economy, argues a new Journal of the British Academy article.

“A note on international comparisons of R&D Tax Credit programmes, the inclusion of the humanities and social sciences, and the policy implications” by Hasan Bakhshi, Director of the Arts & Humanities Research Council’s Creative Industries Policy and Evidence Centre, and Ruth Puttick, Senior Associate at Nesta is one of the first comparative studies of R&D tax credit programmes and the impact of including and excluding SHAPE disciplines (Social Sciences, Humanities and the Arts for the People and the Economy) from those programmes.

The article presents findings from a comparative study of two countries that recognise SHAPE R&D (Austria and Norway) and two countries which do not (Australia and the United States of America) to identify the benefits, impacts and lessons for the UK’s R&D tax credits system.

The authors argue that:

• Despite most countries stating they use the definition of R&D in the Frascati Manual – the Organisation for Economic Cooperation and Development’s (OECD) internationally accepted methodology for collecting and reporting data on R&D – in reality, countries apply elements selectively
• Consequently, R&D tax credits and the definitions they use and the activities they permit have evolved over time. This means that the parameters within which R&D tax relief is fixed can change. It is therefore beneficial to evaluate other countries’ reviews and iterations
• By leaving out the humanities and social sciences from its R&D definition for the purpose of tax relief, the UK government risks missing out on incentivising investment in innovation
• Efforts should be made to connect with tax authorities in other countries which permit SHAPE R&D, to understand the impacts and help inform the design of the UK’s R&D tax credit programme.

The article contributes to the Academy’s efforts to promote the benefits of the SHAPE subjects to R&D by, for instance, exploring how UK businesses invest in R&D in SHAPE. Increasing our understanding of what R&D happens and how it is recognised by UK policymakers, including in R&D statistics, is vital if the UK wants to increase the impact of R&D on society and economy.

Ruth Puttick, Senior Associate at Nesta and co-author of the report, said:

“Our study is one of the first comparative studies of country R&D definitions for tax relief. We have found that the UK, like many OECD countries, claims to use the Frascati Manual definition of R&D for tax relief purposes, however, it's not using the full definition and is excluding SHAPE (Social Sciences, Humanities, and the Arts for People and the Economy) R&D. This is problematic. By not including SHAPE R&D, the UK economy risks missing out on incentivising investment in SHAPE-related innovation at a time when we need to be doing all we can to foster productivity and economic growth.”