Boosting innovation in small- and medium-sized enterprises through tax incentives: lessons from the UK

Abstract Today’s technological frontrunners are tomorrow’s economic champions. In order to triumph in the global innovation race, nations go to great lengths to boost domestic innovation. An increasingly popular instrument of such government support is known as the ‘R&D tax incentive’. Scholars have particularly noted its greater incentive impact on small- and medium-sized enterprises (SMEs). However, correct use of this fiscal tool remains clouded by legal and economic complexities, often leading to misallocation of tax money. This study draws on the rich experience of the UK as a seasoned lawmaker in this field, to derive internationally transferrable policy lessons and principles that may be used in assessing and optimizing the potency of research and development tax incentives for SMEs. Following a theoretical analysis of the historical legal developments, annual government statistics, literature, and policy papers, this study argues that policymakers must take into account appropriateness, cost-efficiency, and accessibility in the design.