An inquiry has found the Federal Government should delay its plan to restrict R&D incentives.

The Coalition outlined a clamp down on R&D tax incentive in last year’s budget, intended to save $2.4 billion.

It wants to cap cash refunds for research activities at $4 million, and bring in a new “intensity test” for larger companies that favours higher, more intensive R&D investment, while carrying harsher compliance and enforcement measures.

Businesses and research groups warned such measures would stifle innovation, add complexity, cause uncertainty and potentially force companies to move operations offshore.

A Senate inquiry into the proposal has recommended it be delayed.

“On the weight of evidence presented, the committee considers that the bill should not proceed until there is further consideration of the R&D tax incentive measures,” the committee said in its report.

Research Australia, a lobby for the sector, said the intensity test would not work.

“By linking the R&D [tax incentive] to the value of R&D as a percentage of total expenditure, the proposed measure not only provides an incentive to increase R&D, but an incentive to reduce other expenditure,” the group said.

“One obvious way to do this is to retain R&D in Australia but move other expenditure, such as manufacturing, to other countries. It also acts as a disincentive to companies undertaking R&D in Australia to increase manufacturing in Australia, and to bring manufacturing on shore.”

The Senate inquiry report found the $4 million cap could “benefit from some finessing to ensure that R&D entities that have already made investment commitments are not impeded unintentionally”.

The R&D incentive bill is part of an omnibus bill that also includes new tax avoidance measures.

The bill seeks to prevent companies from loading up debt artificially to shift profits and avoid tax.

The Senate inquiry has backed these other parts of the bill.