A report by Cambridge Business School warns that the 20-year-old policy could prove a ‘costly failure ‘as aggregate business expenditure on R&D in the UK, as a percentage of national income and net of tax credits, is estimated to be between 10% to 15% lower than before R&D tax credits were introduced.

In the analysis using Office of National Statistics data the cost of R&D tax credits is now equivalent to around a quarter of all UK business R&D.

It finds that an estimated further £1-2bn of R&D tax credit payments now subsidises R&D undertaken outside the UK and other non-business enterprise expenditure on R&D (BERD) compliant company expenditures.

The report also states that the government would struggle to meet its target for R&D spending to reach 2.4% of gross domestic product by 2027 as a result.