Bosses urge compromise deal on R&D tax credits plan

UK Engineering bosses hope to persuade the government against introducing a purely volume-based research and development tax credit for large firms.

Engineering bosses hope to persuade the government against introducing a purely volume-based research and development tax credit for large firms – as announced by the UK chancellor in his pre-budget report on Tuesday.

Stephen Radley, chief economist of Engineering Employers’ Federation, said industry was worried that, under such a scheme, most of the benefits would be swallowed up by the large pharmaceutical firms who invest most heavily in R&D.

The government is due to announce a new round of consultations on the proposal next week. While some sectors have lobbied for the so-called volume-based tax credit, which would apply to companies’ entire R&D budgets, the EEF favours the alternative, ‘incremental’ system of rewards that would apply only to increases in R&D spending.

Although this would provide a much-needed incentive to boost R&D, many believe an incremental scheme would be too complicated to administer.

However Radley said the EEF would now do its utmost to make sure the final tax credit would be designed to reward all those who invest. ‘I am confident that the government can come up with a workable solution that combines the simplicity of the volume-based scheme with the incentives offered by the incremental programme,’ he said.

Gordon Brown said on Tuesday that the volume-based scheme would be introduced in next year’s budget. The move was welcomed by Rob Margetts, deputy chairman of BOC and fellow of the Royal Academy of Engineering. ‘The chancellor deserves congratulations on two counts: first, for recognising the importance of an innovation-friendly tax environment; and second for deciding on a volume-based design.’

Too complex

Margetts chaired a seminar for the RAEng on the design of the tax credit in October. ‘The view expressed then was that an incremental scheme, as favoured in the Government’s original consultation document, would be too complex and would fail to encourage some of Britain’s biggest investors in R&D.’

The Chemical Industries Association also agreed that the chancellor has taken the right tack on R&D. ‘The UK chemical industry has always believed that a volume-based system is the solution, as it will lead to increased investment in innovation by rewarding all R&D. It is a transparent system which is easy to administer and operate,’ said CIA director Dr Anil Kumar. ‘With many countries already offering R&D tax incentives, we foresee that volume-based credits would strengthen the UK’s competitiveness.’

Despite this praise, manufacturers in general were disappointed that the chancellor did nothing to relieve the short term pressures on them. Many, including Martin Temple, director-general of the EEF, were surprised at Brown’s predictions for growth, which he said would spring back to 2.75%-3.25% in 2003: ‘The latest information from manufacturers suggests tough times ahead and they will be disappointed by the chancellor’s statement.’

The chancellor also announced that, from April, capital gains tax would be cut to 20% for business assets held for more than one year and to 10% for assets held for two years. The 10% corporation tax band would also be extended to small companies and the VAT burden on small businesses would be reduced, including an optional flat-rate scheme from next April which would save a typical company up to £1,000 a year. He also announced a risk capital fund of $50m for small businesses.

But a spokesman for the Machine Tool Technologies Association said that it was as if the speech had been made in a parallel universe where the thousands of job cuts and closures suffered by manufacturing during the last year had never happened.

‘We welcome R&D tax credits, the 10p band of corporation tax and £50m being made available to small companies to access risk capital, which will have some long term impact. But it may well be too late for those small manufacturers who have survived by cutting margins, have seen orders dry up since 11 September and are now teetering on the brink of collapse.’