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Research Reveals Lack Of Incentives For UK R And D Tax Credits

by Robert Lee,, London

19 June 2007

Independent research published by the Institute of Chartered Accountants in England & Wales (ICAEW) shows that the lack of incentives for smaller companies to participate in Research & Development (R&D) tax credits will continue, despite recent changes to the system.

According to the ICAEW, the amendments made in the 2007 Budget leave small and medium sized businesses (SMEs) complaining that the application process is cumbersome and expensive.

Undertaken by researchers at Nottingham and Manchester Business schools on behalf of the ICAEW, the research reveals that many businesses do not necessarily consider the tax credits before they choose to invest in R&D (72%), and even more (84%) did not take into account the capital allowance. It also revealed that whether a firm has previously undertaken R&D also has a major influence on whether it may do so in the future. In addition, it showed that the R&D tax credit may not be as effective in encouraging small companies to invest in R&D as larger companies.

The research also found that the claim process is subject to significant uncertainty. SMEs were discouraged from applying for an R&D tax credit due to the uncertainty of whether or not it would be approved, with most respondents saying they were ‘not at all’ confident of success. The average level of confidence for both types of incentive was less than 50%. Added to this, a business might not know if its claim will succeed until 21 months, or possibly longer, after taking the decision to invest. This uncertainty causes particular problems for smaller businesses. In addition, the costs of applying for the credit can vary enormously.

The ICAEW has made a number of recommendations to Government in order to try and make the R&D tax system more effective for SMEs and so stimulate more research and development – a key stated aim of Gordon Brown. Proposals include simplifying the criteria for identifying projects which qualify as R&D, and developing an optional pre-approval process as well as stability and predictability around the incentives, giving firms certainty about what are often long term planning decisions.

Clive Lewis, Head of SME Issues at the ICAEW, said: “We welcome the increase in the level of credit and the extension of the SME R&D tax credits to companies with 250-500 employees in the recent budget. We also welcome the recent setting up of specialist HMRC R & D units to deal with claims for SMEs. But the research shows that the scheme is not effectively incentivising smaller companies to invest in R&D and needs reforming. The recommendations we are making could have an immediate impact on the way SMEs both view and use the scheme.”

The report surveyed over 140 businesses, each investing above the GBP10,000 qualifying threshold for credits, and was written by Mohsen Derregia and Francis Chittenden, both of the Manchester Business School. The research was funded by the ICAEW’s charitable trust.

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