Tax credit token gesture slammed

Industry fears the government’s planned tax credit for research and development could become nothing more than a token ‘box-ticking exercise’, under-resourced and biased against engineering R&D.

The chancellor plans to introduce a tax credit scheme in his March Budget, and is running a consultation exercise to determine how it will operate.

But Tom Gunner, government relations manager at the Society of British Aerospace Companies, said: ‘If the tax credit scheme is to have any chance of success the government must invest a meaningful amount of money.’ He quoted one Treasury official as saying ‘at least we will be able to tick the box of having an R&D tax credit system in place’.

Gunner said: ‘Reversing decades of under-investment in R&D in the UK will take more than a box-ticking exercise.’

Industry hopes the government will invest £1bn, to create a system capable of reducing the cost of R&D spending by UK firms by up to 10 per cent. But most now expect the figure will be closer to £300-£400m. ‘We believe a 10 per cent rate is necessary, if the tax credit is to be effective above the noise level of all other variables, such as interest rates or exchange rate fluctuations – three to four per cent would not be meaningful,’ said Gunner.

Canada is often held up as a model for such schemes. It offers firms a 20 per cent tax credit that is so successful that it has made more money than it cost to run.The consultation will decide from three options: a simple volume scheme with a single rate for all qualifying R&D spending; a two-tiered system in which tax relief is set at a higher rate up to a threshold and at a lower level beyond; or a scheme to reward all research spending above a company-specific baseline.

Industry is now broadly in favour of the simple volume-based scheme, as the other two options are too complicated and would make it difficult for firms to predict the tax credit they would receive from one year to the next, said Gunner. There is concern that much of what industry considers engineering R&D will not qualify for credits under the government’s definition. It is likely the scheme will only reward spending on new projects, rather than the development of existing technologies.

Tom Wills-Sandford, director of information and communication technologies at the Federation of the Electronics Industry, said: ‘The definition is very ambiguous. It does not include a lot of what I would call engineering R&D: it is too science based.’

This emphasis on scientific R&D could mean a lot of engineering development work is considered purely incremental, and so ineligible. But he argued in the FEI’s submission to the Treasury consultation that engineering is built on incremental changes: ‘The worldwide telecoms network, probably the most complex system in the world, has evolved by incremental improvements. It was not invented in a big bang.’ An Inland Revenue spokeswoman said the final decision will be announced in the Budget.