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PBR: Increasing investment in R&D

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In his Pre Budget Report, Gordon Brown announced the implementation of a ten-year ‘Science and Innovation Investment Framework’, strengthening the partnership with business on raising investment in UK R&D and improving business-university collaboration.

Under the banner of “promoting enterprise, innovation and skills” he stated that Britain has high employment levels but the amount of output produced per worker – productivity – has historically been lower than in other major economies. Recent figures suggest the UK’s performance is improving, with productivity on an output per worker basis now higher than Germany and moving closer to France.

Investment in research and development (R&D) in the UK fell during the 1980s and 1990s to 1.24% of GDP in 2002, significantly less than in France, Germany and USA. To equip the UK to prosper in the global economy, the Chancellor has set an ambitious target for the UK’s spending on R&D to reach 2.5% of GDP by 2014, from a current level of 1.9%.

Unfortunately the PBR did not contain any specific measures, so businesses wishing to invest in R&D will be tempted to delay implementing any expenditure plans. Between now and next spring the Government will be discussing the forward commitments to R&D of the leading R&D businesses on the UK with the aim of deriving an aggregate indicator of future business investments in order to track progress towards the 2.5% target.

Despite suggestions in the press that smaller businesses are failing to take full advantage of the 150% R&D tax credits, the Treasury claims that over 95% of eligible SMEs claimed R&D credits in 2002-03. However, as the Chiltern group suggested recently, “due to misconceptions about what activities qualify as R&D, many companies are not applying for credits due. Even when companies do apply for the credits, the applications are often met with scepticism by the Inland Revenue, further discouraging companies from applying in the future.”

Updated guidance has now been published as part of a joint Inland Revenue/DTI programme to help businesses understand the system and to ensure consistent treatment of claims.

The Government will be looking in 2005 at the “impact of the credits on firms as they grow beyond the SME threshold”, so larger companies may receive additional help in future. KPMG partner Jeremy Brittain commented earlier this week: “The introduction of tax relief at 150% for small and medium sized companies undertaking R&D has been a great benefit to the many businesses which have successfully made claims. We were extremely pleased to see this incentive extended to large companies in 2002, but the level of relief at 125% could be too small to effectively influence the investment decisions of larger companies. The Government needs to enhance the relief available and also introduce some consistency into the process of making and agreeing claims.”

In the longer term there may also be targeted R&D help for technology-based manufacturing and service sectors which currently invest less in R&D than their US counterparts. Evidence will be gathered over the next 18 months to see how these sectors can be helped to boost R&D, including through R&D tax credits.

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Other Pre-Budget Report announcements aimed at improving innovation and skills include:

* a National Employer Training Programme providing free and flexibly delivered training for low-skilled adults in work, and a new review to look in depth at the UK’s future skills needs; and

* reforms to reduce the regulatory burden on enterprise, and publication of the interim report of the Hampton Review consulting on improvements to the current system of regulatory inspection and enforcement.

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