84/03
10 July 2003
DEFINING INNOVATION – GOVERNMENT LAUNCHES R&D CONSULTATION
A consultation on improving the definition of research and development (R&D) for tax credit purposes was published today by Chancellor Gordon Brown. ‘Defining Innovation’ will ensure that the definition is up to date, technologically consistent and internationally competitive.
Chancellor Gordon Brown said:
“The Government introduced R&D tax credits in recognition of the importance of innovation for driving up the UK’s productivity. They have been welcomed by businesses because they provide a real incentive for additional R&D spending. We now intend to build on the success of R&D tax credits by ensuring that the definition of R&D provides businesses with the clarity and certainty they need.”
Patricia Hewitt, Secretary of State for Trade and Industry said:
“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.”
Since the R&D tax credits were introduced – in 2000 for small and medium-sized companies and 2002 for large companies – the Government has worked closely with businesses and their representatives to make sure the operation of the tax credits scheme is as straightforward as possible. An improved definition of R&D will help companies understand the likely benefit of the credit at an early stage in their R&D planning their R&D activities, giving them greater investment certainty.
‘Defining Innovation’ consults on:
- rewriting the current definition of R&D for tax purposes, published by the DTI, so as to provide greater clarity and certainty for companies;
- exploring areas where the definition might be extended, such as design, to take account of the full range of innovative activities carried on by companies; and
- providing greater certainty over what constitutes ‘consumable stores’ for tax credit purposes; the extension of the credits to include expenditure on licences for advanced software; and the definition of ‘qualifying bodies’ (to which large companies can subcontract R&D).
The R&D tax credit is an integral part of the Government’s strategy to improve productivity growth in the UK. The consultation on the definition of R&D will complement broader policy development to support innovation and growth by UK business, including the Lambert Review on business-university collaboration, and the DTI Innovation Review. These will both report by the autumn.
Through the R&D tax credit and other policy measures, the Government can help create a supportive framework for business. But it can only deliver its innovation goals for the UK by working with businesses investing in research, technology and the skills needed to generate productivity gains. To raise the profile of R&D skills and careers and provide a link between policy initiatives, such as the R&D tax credit, and business, the Government will support the creation of an R&D Employers Forum by this autumn, as recommended by Sir Gareth Roberts in his 2002 review of science, engineering and technology skills.
NOTES TO EDITORS
Consultation on the R&D definition
Research and Development (R&D) tax credits were introduced for small and medium-sized enterprises (SMEs) in 2000 and for large companies in 2002. At the same time as the SME tax credits were brought in, the Government introduced a definition of R&D for tax purposes, in Guidelines issued by the Secretary of State for Trade and Industry.
The tax credits have proved popular, stimulating a great deal of interest from businesses, academics and representative bodies such as the CBI and the TUC. As a result of the useful dialogue involving those with an interest in R&D both inside and outside Government, a number of improvements to the tax credits schemes were announced by the Chancellor in Budget 2003.
As they have become familiar with the procedure for claiming the tax credits, companies have expressed concerns that the definition of R&D does not provide them with the degree of clarity and certainty they need to calculate which of their activities will qualify for the credit and thus the likely benefit.
The Government has taken account of these views and in Budget 2003 the Chancellor also announced that a consultation would be held on improving the definition of R&D. The Government believes that the tax credit is set at a generous rate and that the process of claiming the credit – via the Corporation Tax return – is straightforward. It is important, however, that companies are able to understand what activities they can claim for. The Government is keen to consider not only how the definition might be reworded to provide that greater clarity, but also areas where the definition might be extended, to better represent the R&D being undertaken by the UK’s innovative companies.
In addition, the Government is seeking views on:
- The definition of ‘consumable stores’ – items that qualify for the credit which are stored and consumed as part of the R&D process. How can any areas of uncertainty over what constitutes ‘consumable stores’ be best resolved?
- Licences for advanced software – these do not currently qualify for tax credits but for some businesses their role is similar to that of consumable stores. Can a suitable definition be arrived at which would enable them to qualify for the credit?
- Subcontracted work and qualifying bodies – large companies cannot generally claim for the costs of work contracted out to others, but there is an exception where the work is outsourced to ‘qualifying bodies’ such as universities and health bodies that cannot themselves benefit from the credit. The consultation considers two classes of subcontractor that could be included within ‘qualifying bodies’ – foreign universities and public sector research establishments.
R&D Employers Forum
In April 2002, Sir Gareth Roberts report ‘SET for success: the supply of people with science, engineering and technology skills’ was published. The report set out a series of recommendations to the Government, employers and others with an interest in fostering science, engineering and innovation in the UK. One of his recommendations was that the Government:
“should establish a group of R&D employers to support and monitor employers’ responses to the challenge of improving the pay, career structures and working experiences for scientists and engineers in R&D. The group should include representatives from businesses (large, medium and small) and others that employ scientists and engineers in an R&D capacity.”
In responding positively to Sir Gareth’s report in July 2002 (in ‘Investing in Innovation: a strategy for science, engineering and technology’), the Government agreed that an R&D employers group could play an important role, and agreed to assist in ensuring that such a group is established.
The proposed forum will support employers’ efforts to meet the challenge of improving pay and career structures for those working in R&D as well as informing Government policies on innovation and R&D. It will build on the strengthening dialogue between Government and business, through the CBI, on the productivity agenda, and on the extensive consultations conducted as part of the DTI Innovation Review and the Lambert Review.
The R&D consultation document is available on the Treasury website.
Responses to the consultation should be sent to:
R&D Consultation,
Technology and Innovation Team
HM Treasury
1 Horse Guards Rd
London
SW1A 2HQ
Or by e-mail to: rdconsultation@hm-treasury.gov.uk to arrive no later than 10 October 2003
Government Department Internet Sites:
Inland Revenue: www.inlandrevenue.gov.uk
Department of Trade and Industry: www.dti.gov.uk
Roberts Review report ‘SET for success’:
http://www.hm-treasury.gov.uk/roberts