Research and Development (Hansard, 25 March 1999)

§ Mr. Battle

The Government recognise the important role which research and development (R&D) plays in a modern knowledge-driven economy. This was the theme of the consultation document published jointly by HM Treasury and DTI on Budget Day 1998 entitled "Innovating for the Future: investing in R&D".

The findings from this review have already influenced both the planning for future Budgets and the Government's Competitiveness White Paper "Our Competitive Future—Building the Knowledge Driven Economy" published last December and its follow-up Implementation Plan (published by the Secretary of State for Trade and Industry on 10 March).

The Budget announcements on 9 March included details of the Government's intention to introduce a research and development tax credit for small and medium enterprises (SMEs) in the 2000 Budget. The Secretary of State for Trade and Industry announced on 10 March the publication of the Inland Revenue's technical paper to consult further with business on the detail of this measure. This represents a key output from the Innovating for the Future consultation which, in addition to the tax treatment of R&D, considered a range of questions looking at how best to remove barriers to innovation.

Around 200 representations were received. Of those commenting specifically on questions relating to tax credits, respondents can be divided into five main types: companies; business organisations; professional and union bodies; accountant and tax firms; and academic institutions. Individual companies gave a mixed view on tax credits from those firmly in support to those who felt such a measure might be less effective. The main business organisations also provided a variety of opinion with the CBI, for example, arguing that the feasibility of a targeted credit for SMEs should be assessed; the CBI reaffirmed their support for a specific SME measure in their Budget submission earlier this year. Professional and union bodies were almost totally in favour of tax credits (as were the majority of academic institutions) although the main accountancy, insurance and tax firms generally provided a more cautious response; a number advocating further analysis before any measures might be introduced.

A main theme to emerge from the consultation was the concern that any R&D investment measure introduced should also provide assistance to the most cash-constrained small companies in their start-up and early stages, when they are "tax exhausted" and would not immediately benefit from extra allowances to reduce their corporation tax. This message was also emphasised by the Williams Group's report to the Treasury (November 1998) analysing barriers to growth faced by high-tech 352W small firms. In the light of these views, and the Government's own research and analysis, the Government announced at the Budget their intention to introduce a comprehensive R&D tax credit for SMEs, which would also involve a payable element for companies not yet in taxable profit.

In addition to this key measure other important outputs from the Innovating for the Future consultation are as follows.

Intellectual Property Establishing a rational and less complex system for the taxation of intellectual property (IP) was an important conclusion to emerge from many respondents. IP is one of the key outputs of firms' innovation and R&D investment. The 1998 Pre-Budget Report therefore announced that the Government would consult, by the 2000 Budget, on two possible measures to reduce tax compliance costs and distortions on business decisions affecting IP transactions: moving towards a simpler system of IP taxation, essentially following the accounting treatment for relieving expenditure on IP purchases and taxing proceeds; and; simplifying the taxation of royalty payments which accrue to the owners of intellectual property rights. In addition, the Competitiveness White Paper set out details of the Government's Intellectual Property Rights (IPR) action plan. This focuses on making the IPR system more affordable and accessible including a review of the impact of fees charged by the UK Patent Office. Work will also be taken forward to ensure the system is better able to keep pace with developments in new technology by, for example, agreeing EC Directives on copyright in the information society and stronger protection for software-related inventions. The action plan would also involve reform of the civil law system for IPR litigation; a push for an EC patent which is affordable and easy to enforce and work to ensure that EU harmonisation of "second tier" or "petty patents" benefits UK firms, particularly small companies.

Accounting Treatment The consultation also highlighted the importance of measuring and reporting the value of innovation and intangible assets if firms are to manage their R&D activities effectively. The Government encourage companies to use the framework provided by current accounting standards as a means to inform their own R&D investment decisions and to disseminate information about their R&D activities to the market as a whole. As announced in the Competitiveness White Paper, the Government have therefore asked the Accounting Standards Board, in consultation with others, to take a fresh look at this issue. DTI will also be launching a best practice programme to identify and disseminate best practice for companies of all sizes in assessing the strengths and weaknesses of their intangible assets.

Science Exploitation, Management and Finance The Competitiveness White Paper and recently published Implementation Plan include a range of new and reinforced measures to promote competitiveness within the knowledge driven economy. This included a particular focus on creating and exploiting knowledge and many have a strong resonance with the comments received on the Innovating for the Future consultation. For example: the doubling of DTI funding for the popular TCS (Teaching Company Scheme); funding for a national network of Faraday Centres to bring together businesses, scientists and engineers to commercialise research; a significant extension of the Smart scheme to help more small manufacturing firms to turn their innovative ideas into commercial reality; the further development of the University Challenge Fund (the Chancellor's Budget Statement included an extra £15 million) and the establishment of a £25 million Science Enterprise 353W Challenge (announced in the Pre-Budget Report) to establish up to eight new enterprise centres in universities to promote business skills and the commercialisation of research; a national Venture Capital Challenge Fund to help provide, in partnership with private sector funding, risk capital to early stage high technology companies; Enterprise Management Incentives (EMIs) to allow smaller, higher-risk companies recruit and retain talented managers; new measures for corporate venturing, which look at tax incentives to encourage firms to invest in and become involved with small, high risk companies.

Copies of responses to the Innovating for the Future consultation have been placed in the Libraries of the House.