Most government support for research and development subsidises investment that would have been made anyway according to a respected think tank.
The Institute for Public Policy Research (IPPR) estimates that up to 80% of tax credits for research and development (R&D) are a “deadweight”.
It said the subsidy should be “largely abolished”, saving up to £1.9bn a year.
The Treasury said that R&D tax credits “help British businesses innovate and grow”.
“For every £1 that goes on the relief, up to £2.35 in investment is created.
“Latest figures show that 83% of claims for R&D tax credits were from small and medium-sized enterprises,” a Treasury spokesperson said.
The report comes just days before the government is expected to launch its industrial strategy.
The aim of the strategy is to increase productivity, which has been weak for years in the UK and boost growth across the whole country.
“The government is in danger of missing the point in its industrial strategy,” said Michael Jacobs, director of the IPPR Commission on Economic Justice and co-author of its report.
He said the focus has been on sectors like cars and pharmaceuticals, where productivity is already high.
“The UK’s productivity problem lies in the vast majority of ordinary firms, in sectors such as retail, light manufacturing, tourism, hospitality and social care,” Mr Jacobs said.
Productivity could be boosted by giving small and medium-sized companies classed as ‘good jobs employers’ a 1% cut in corporation tax.
High quality jobs from such employers would meet a “good jobs standard” on training, pay and benefits, working hours, career progression, participation in decision-making, and union representation.
The IPPR would also like to see the phasing-out of the patent box scheme, which gives firms a lower rate of corporation tax on profits earned from patented inventions.
It says that in 2014/15 financial year 800 firms made use of the system but 95% of the tax relief claimed went to 305 of the biggest UK companies.
“The evidence suggests that neither of these indirect support mechanisms through the tax system are effective at expanding and diversifying the UK’s base of innovating businesses,” the IPPR said in a discussion paper.
“Both policies predominantly channel funds to large, established companies: deepening their existing advantage in the UK, rather than expanding advantage to new firms.”
The IPPR says that abolishing R&D tax credits and the patent box scheme would save around £3.6bn annually, which could be spent on projects that would spur innovation more effectively.
It says a new National Investment Bank should be created to invest in infrastructure, housing, business growth and innovation.
It would like more money to be directed to Innovate UK, the government’s existing agency tasked with boosting productivity and innovation.
The CBI, which represents some of the UK’s biggest businesses, agreed that Innovate UK should get more support, but not at the expense of other programmes.
“Getting rid of R&D tax credits and the Patent Box during a time of uncertainty, would in effect only serve as a tax on the UK’s most innovative firms.
“While more can be done to get SMEs [small and medium sized enterprises] involved, more smaller businesses are using the tax credit each year,” said Tom Thackray, CBI innovation director.