31 the R&D tax credit: an incentive for firms to increase their R&D expenditure

Since 2013, the R&D tax credit (CIR) has included three components according to the type of eligible expenditure: research expenditure, innovation expenditure and collection expenditure for the textile-clothing-leather sectors.
The amount of tax credit paid out in totalled €5.57 billion for research expenditure, €74 million for innovation expenditure and €65 million for collection expenditure, a total of €5.7 billion.

Many countries now use tax incentives to stimulate more spending on research and development (R&D). The development of such incentives over the past decade is explained in part by the fact that this type of financial support is well-suited to today’s culture of innovation, which is both demanding and fast-moving. Tax incentives give firms the freedom to choose their R&D projects, without targeting a particular sector or technology and are therefore well-suited to the complexity and multidisciplinary nature of innovation processes. The increased use of tax incentives also reflects the competition that exists between different countries when it comes to attracting R&D centres.

The expansion of the CIR in 2008 has encouraged a growing number of firms – and small firms in particular – to apply. More than 22,800 firms declared around €21 billion in eligible expenditure. The total credit paid out in 2013 was €5.7 billion (table 31.01).

Since 2013, the CIR basis consists of three types of expenditure (see methodology). Research expenditure represents 96.5% of expenses and 97.6% of credit paid out. Innovation expenses, for which SMEs that were deemed autonomous for tax purposes are eligible, generates a credit of €74 million (1.3%) and collection expenses generate a credit of €65 million (1.1% of the total).

15,245 firms received research tax credit. Of these, around 90% had fewer than 250 employees, receiving 31% of the credit paid out. SME that were deemed autonomous for tax purposes represented 60% of CIR beneficiaries (table 31.02a). They represented 16.2% of declared expenditure and received 17.5% of the credit. All the firms, excluding the largest ones, received a share of the credit that was greater than their proportion of expenditure. All the size categories had a CIR rate of 30%, apart from beneficiaries with over 5,000 employees, for whom the ratio of credit to expenditure was 24%, as a result of the reduced rate of relief for firms with over €100 million expenditure. The average credit paid, however, increased with the size of the firm, as R&D budgets grew according to the number of staff. The average credit paid out to all firms was €365,000, whereas for firms with fewer than 10 employees it was €51,000.

3,445 SMEs that were deemed autonomous for tax purposes received innovation tax credit (CII) (table 31.02b). Nearly 85% of the beneficiaries have fewer than 50 employees. On average, the declared innovation expenses were €108,000 and the credit was €22,000. The beneficiaries did not therefore reach the €400,000 ceiling of expenses eligible for CII (see methodology). Even the largest SMEs (100-249 employees) did not reach this ceiling, with average expenses of €163,000.

table 31.03a shows the sectoral distribution of CIR. Manufacturing industries receive 61% of research CIR and the service industry receives 37%. The 'Electrics and electronics' sector declared the most expenditure (15%) and received the most CIR (16%) The ‘manufacture of basic pharmaceutical products and pharmaceutical preparations’ was the second largest sector in terms of declared expenditure (14%) and the third largest in terms of CIR received (12%). This sector receives a lower proportion of credit as a result of the concentration of R&D expenditure in large laboratories, to which a reduced rate of relief is applied. The ‘manufacture of motor vehicles’ industry has a similar configuration, with large companies and R&D centres representing high amounts of expenditure. Its share of the credit received was 6%, compared to 8% of declared expenditure. The ‘Computer-related consultancy and support’ sector was third in terms of expenditure (11.7%) but second in terms of credit received (2.6%). ‘Architectural and engineering services’ services were in fourth position for both expenditure and credit, ahead of ‘manufacture of motor vehicles’ and ‘manufacture of ships, aircraft and rolling stock’, in particular.

table 31.03b shows the sectoral distribution of CII. Manufacturing industries received 30% of CII and the service industry received 68%. Unlike research CIR, CII is mostly received by service companies. CII is also much more concentrated on a few sectors than research CIR. The ‘Computer-related consultancy and support’ sector in fact receives over 36% of the credit paid out.

Justin Quemener