UK needs incentives to attract talent

While attracting talent into the UK is often seen as taking jobs away from UK residents, it may be a more effective tool in stimulating innovation in the UK as well as economic growth for the benefit of all UK residents than tax incentives available to businesses today. 

One of these incentives operates to effectively reduce the cost of innovation in the UK by 15% (the “research and development (R&D) expenditure credit regime”). The other incentive is designed to reduce the rate of corporation tax on profits arising from the innovation from 25% to 10% (the “patent box regime”).

Is there evidence that these incentives are working? Based on the most recent statistics released by HMRC, increasing benefits are being claimed across both regimes, with an 11% increase in the value of R&D tax relief claims and a 14% increase in the value of patent box claims. These numbers would suggest that these regimes support the government’s objective of increasing innovation.

However, in an increasingly competitive global market, R&D tax relief and patent box regimes are common tools used by many countries. Just the existence of these incentives therefore does not create a real advantage for the UK, it needs them to remain competitive.

Ultimately, tax incentives can be a distraction from more fundamental commercial factors, including developing and attracting the right talent into the UK. In a global market, businesses can source talent from almost anywhere in the world. However, it is in the UK’s economic interest to have this talent located in the UK.

Why? Because one of the cornerstone principles of the UK corporation tax system (the “arm’s length” principle) requires a group’s global profits to be taxed in accordance with where its significant people functions are located. Under this principle, the centralisation of talent in the UK (particularly senior decision-making talent), results in higher UK corporation tax receipts from these groups.

It also simultaneously results in increasing personal income tax, VAT, and other UK tax receipts. The economic benefits of incentivising groups to locate their talent to the UK is significant.

With the Autumn Statement upon us, and elections just around the corner, clear messages on how the parties intend to support business innovation in the UK will be important. The government needs to focus on developing policies to attract and grow talent in the UK.