Taking credit

Much has been said of the government’s desire to ‘rebalance’ the economy towards manufacturing and high technology as a platform for sustainable economic growth. However, the current scheme, providing £1bn per annum of funding for business research and development (R&D), of which £700m is set aside for large companies, isn’t effective in doing this.

This could all be about to change.

Years of campaigning in support of innovative businesses has now led to a consultation by HM Treasury that outlines the designs for a new ‘grant-like’ credit for R&D. It replaces the existing R&D incentive for large companies but has some very important features that will make it much more valuable. Most importantly, it will be given against the actual cost of R&D so product development and R&D heads can set it against the expenditure they are responsible for.

Additionally, the credit will be payable to a company regardless of its tax position, in contrast to the existing scheme, which reduces the tax charge on a company’s profits and only has a cash value if the company is paying corporation tax.

This should be great news for most of the 2,000 or so large companies affected. PwC’s recent economic analysis actually indicated the scheme could generate more than 30,000 jobs and grow the economy by up to £1.4bn.

So why get involved? Well, by reducing the cost of UK R&D to our companies, this will make us more globally competitive, which is essential to retaining and attracting the skills needed for the UK to lead in high technology. Also, many businesses in the UK experience periods where they simply don’t have taxable profits — often due to heavy investment and long development cycles. At present, the current scheme provides no support in this situation, whereas the new one will give cash right at the point when it is most needed.

By reducing the cost of UK R&D to our companies, this will make us more competitive

Many manufacturing businesses, particularly in the automotive, engineering and technology, and aerospace and defence sectors, have indicated they are very keen on the scheme. The severe downturn combined with capital-intensive development and long lead times to bring new technology and models to market means that many of these businesses aren’t currently paying corporation tax and get no support for their R&D. This is at a time when support is more vital than ever as we need to seize the opportunity to develop a lead in low-carbon technologies.

The new ‘grant-like’ credit could allow R&D budget holders to knock between seven per cent and 10 per cent off investment appraisals, making the UK more attractive for innovation. The actual percentage will be determined as part of the consultation, which I hope R&D leaders in these companies will take part in.

Giving the government support for R&D directly to the people doing this work isn’t just about impacting the R&D cost — it is also about recognising hard work and ingenuity, and it is important that the credit is given to the people whose skills we need to reward. The new R&D credit is one step in the right direction and much more needs to be done.

Ultimately, if you are responsible for R&D or product development, it is your budget that will be affected by the new R&D credit and the design of the scheme is yours to shape. We all need to do more in the UK to ensure the best and brightest of our students in the science, technology, engineering and maths subjects go on to work successfully in those areas.

To participate in the consultation, use the link to the consultation document below. The deadline for submissions is 29 June 2012.

http://www.hm-treasury.gov.uk/consult_above_line_credit_rd.htm

Diarmuid MacDougall R&D patent box partner at PwC