Tax rules could damage UK technology innovation

The UK's IT industry is calling for an extension of the qualifying rules for tax credits on research and development (R&D) following a consultation document that has been issued by the chancellor, Gordon Brown.

The Treasury has opened the document to consultation until 10 October 2003 because of complaints from the software industry that UK companies are at a competitive disadvantage to international rivals when developing innovative technologies.

Currently companies are entitled to tax credits of 25 per cent on R&D spend, which effectively amounts to a net reduction of 7.5 per cent on a company's 30 per cent corporation tax.

UK software and services industry group Intellect has welcomed the consultation but says that unless the rules for qualifying expenditure are widened they will limit the UK's ability to compete globally and attract R&D funds.

Tom Willis-Sandford, director of campaigns at Intellect, told silicon.com the current rules are too restrictive and that only around a half to two-thirds of R&D expenditure is eligible.

"Basically it doesn't cover overheads and facilities. If you are a large company and spend £100,000 on R&D you get 7.5 per cent back from the government on direct expenditures. That is something an R&D manager would pay attention to. In fact only somewhere between a half and two-thirds are covered so that reduces the effective figure down to around four per cent and it starts to get a bit minor."

The R&D tax credits were first introduced in 2000 for small and medium sized businesses and then widened to large corporates in the 2002 budget. According to government estimates £16bn is invested in R&D by UK companies each year.

The 'Defining Innovation' consultation will review the current definition of R&D for tax purposes and explore areas it can be extended. The tax credit is part of the government's strategy to improve the productivity and international competitiveness of UK firms.

Patricia Hewitt, Secretary of State for Trade and Industry, said in a statement: "R&D is vital to firms’ survival and growth. Innovations in production processes and the development of new or improved products and services can cut costs, improve quality and win orders. R&D tax credits have a key role to play and it is essential that companies understand which activities will qualify, so that they can more effectively plan their investment in R&D."