Brown’s tax brainchild wins support

As the chancellor pushes hard for R&D tax credits in Europe, Byers announces a comprehensive range of measures aiming to increase business competitiveness.

Hopes for a research and development tax credit were raised this week, as EU ministers responded positively to Gordon Brown’s calls for a Europe-wide discussion of R&D funding.

Speaking at this week’s Ecofin meeting of European finance ministers, the chancellor called for R&D activity in EU member states to be considered at next month’s council of ministers in Stockholm.

A spokesman for the Swedish government told The Engineer that Brown’s proposal was an important contribution and the Swedish finance minister, Bosse Ringholm, who was also at the Ecofin meeting, said it would be considered for inclusion on the agenda.

The chancellor’s proposal was made amid rising concern that R&D tax credits, such as those already offered in the US, could be against EU rules on state aid for industry. A spokesman for the Treasury said the chancellor hoped a discussion by EU leaders would lead to an investigation into European R&D activity and how it is promoted in each country, including tax credits.

It is thought that developing a Europe-wide strategy might allay EU ministers’ fears of a UK tax credit upsetting a level playing field.

Dr Keith Goffin, professor of innovation management at Cranfield University, said the EU’s rules might need to be re-thought: ‘You wouldn’t have this discussion in countries such as Singapore or Malaysia, where they recognise the need to invest in manufacturing industry. The EU needs to be much more flexible.’

Prior to the Brussels meeting, the EEF expressed concern that the government’s attitude towards tax credits may be cooling. Figures released recently by the organisation found the overall cost to the Treasury would be very low because the tax credit would target only those firms which plan to increase R&D spending.

Firms would benefit by £225m a year from a 50% incremental credit, but with 40% of all R&D spending going on wages and salaries, the Treasury would receive an extra £240m in income tax and National Insurance contributions, said Stephen Radley, EEF chief economist. ‘R&D is a fairly labour-intensive activity, so the government would be getting a fair amount of money back from income tax and National Insurance, particularly from large multinational companies.’

Meanwhile the government’s own UK Competitiveness Indicators report, published this week by the Department of Trade and Industry, found that both business and government spending on R&D in the UK lags behind our major competitors. The report said direct government funding of business R&D, such as tax credits, increases both the amount of R&D a company undertakes and its productivity.

The US spends 3% of its income on R&D, compared with only 2% in Europe. Monica Maguire, a R&D expert with the US National Association of Manufacturers, said two-thirds of manufacturing growth results from advances made by research and development. ‘We don’t see tax credits as a subsidy. Alan Greenspan said recently that much of the growth the US saw in the 1990s was the result of research and development.’

While the UK has traditionally lagged behind countries such as the US in exploiting R&D, the country’s science research base is highly regarded on the international stage. Dr Markus Bayegen, chief technology officer in charge of R&D at global engineering group ABB, said the quality of British universities and engineers means the company would rather invest in the UK than in continental Europe. ‘Politicians can always make it easier, but the UK is very formidable for R&D. It is one of the places where there are good opportunities to grow R&D, as there are in the US.’