6 The policy framework
R&D tax credits
101. R&D tax credits are the key Government
policy for raising levels of business investment in R&D. The
scheme was established first for SME research spending after 1
April 2000 and was extended to large company spending after 1
April 2002. In order to claim, companies must undertake qualifying
R&D, a government definition of which is given as "working
to resolve scientific or technological uncertainty aimed at achieving
an advance in science or technology".[116]
Innovation in products, processes and services is not currently
defined as R&D.
102. The credit can be used to reduce a company's
tax bill or, for some SMEs not in profit, to provide a cash sum.
Companies must be spending at least £10,000 a year on qualifying
R&D and can claim for revenue, but not capital, expenditure.
SMEs (fewer than 500 employees and an annual turnover less than
100m or annual balance under 86m) can make a deduction
of up to 175% of qualifying expenditure incurred on R&D activities
when calculating their taxable profit (they can also claim a credit
for R&D performed if they are not in profit). Large companies
can claim up to 130% of expenditure incurred. From 1 August 2008,
companies can also claim 140% (down from 150%) of their qualifying
vaccine research expenditure. In 2006/07, over 6,500 R&D tax
credits claims were made, meaning that government support totalled
£650 million, split between SMEs (around £180million)
and large firms (around £460million).[117]
103. A CBI survey published February in 2009
found that the value of the credit to companies now exceeds the
"noise-level for investment decisions"; it was large
enough to influence companies' decisions. Key findings included:
- savings on R&D costs delivered
by the tax credit now average 8% (with SMEs on average saving
10.5%, medium-large companies 8.5% and large companies 6.0%);
- 37% of companies surveyed increased R&D as
a result of the credit; and
- three quarters of companies surveyed said the
credit had helped directly or indirectly to maintain their R&D
investment in the UK.
104. The CBI survey also found that the role
of HMRC in handling claims and providing advice had improved significantly.
Also, the credit was an important factor for companies when deciding
where to base R&D activity, improving the attractiveness of
the United Kingdom as a destination for high value investment
and jobs.[118] Our
witnesses also acknowledged the success of the R&D tax credit
scheme. For example, the Institute of Physics[119]
and NESTA said that "Studies have consistently shown that
R&D tax credits are effective at raising investment in R&D".[120]
Universities UK said that they "strongly support R&D
tax credits extension to companies with less than 250 employees,
which, in a SME-dominated economy, is vital to achieving the government's
targets for research and innovation".[121]
Rolls-Royce, giving the perspective of a large, multinational
company, told us that the tax credit "incentivises those
who spend on R&D to continue to do so in the UK".[122]
105. Most witnesses considered that it was too
early to evaluate the scheme, given that larger firms in the United
Kingdom have only been able to benefit from the tax credit since
2002.[123] Even so,
the CBI noted that "the R&D tax credit may not be an
incentive for the short term, but with more certainty and continuity
of the legislation, business will be able to work the relief into
its long term strategy and it will increasingly stimulate innovation
in parts of the UK economy where R&D is an important factor".[124]
The CBI told us the Government would evaluate the scheme in 2014.
106. However, the evidence also highlighted a
number of concerns about the more detailed workings of the scheme.
Some evidence suggested that tax credits were complex and not
widely known about or taken up. The Institute of Chartered Accountants
in England and Wales (ICAEW) said that "the majority of SMEs
do not consider tax credits before they choose to invest in R&D
[
] there is significant evidence that the R&D tax credit
is not as effective in encouraging smaller business to invest
in R&D as compared to larger business".[125]
Coventry University noted that SMEs could not always get good
advice from accountants and suggested that the system needed to
be simplified.[126]
107. Rolls-Royce also warned while that the tax
credits were useful, they were only worth a small amount of money
to them, particularly compared to the incentives provided by the
US and other countries.[127]
Sir John Rose warned that if the United Kingdom:
wants to be in high value added manufacturing, it
has to understand the competitive environment in exactly the same
way as a company has to understand the competitive environment
the rational company will go to those places where the environment
is more conducive to what they are trying to do.[128]
It is worth noting the importance of research and
technology incentives to many companies operating in the United
Kingdom's most successful manufacturing sectors. In a climate
of increasing international competition for mobile R&D investment,
this factor must be borne in mind when deciding policy on the
future of the R&D tax credit scheme.
108. On balance, the evidence
available suggests that R&D tax credits have been successful
and that they are becoming more so as awareness of them grows.
Businesses take time to adjust to new policy instruments, so this
increased awareness is not surprising. We recognise, then, that
the policy needs time to produce its full effects, and welcome
the Government's commitment to a full evaluation in due course.
However, although we support the principle that business needs
some basic certainty about the incentives available, this should
not prevent improvements to the tax credit scheme before then.
We particularly urge the Government to look at ways in which the
scheme could be made more accessible to SMEs by reducing both
the eligibility thresholds and the complexity of the scheme.
109. Questions were also raised about the principles
on which the scheme has been built. NESTA highlighted the fact
that R&D is becoming increasingly global, which raises questions
about what expenditure should qualify. NESTA noted that "R&D
performed by foreign multinationals in the United Kingdom generates
benefits for the UK economy, while R&D expenditures by UK
firms abroad improve the United Kingdom's ability to apply new
knowledge".[129]
We encourage the Government to consider this point in the future
development of tax credit policy.
110. NESTA argued that Government "policy
should concentrate on building capacity for innovation rather
than the creation of specific innovations" and therefore
that the tax credit should be widened beyond traditional R&D
to encourage innovation more generally and particularly to take
account of innovation in the service sector. It suggested that
an innovation tax credit should replace the current R&D tax
credit.[130] The CBI
also called for the extension of the scheme (and other government
supported measures) to the service sector,[131]
saying that "R&D is only one factor in innovation and,
with our service-dominated economy, not always the most important.
Care is thus needed in making international comparisons on the
potential for value-added activity in the economy on the basis
of national R&D performance alone".[132]
111. The Committee strongly
agrees that innovation is much broader than R&D and that wider
innovation should also be encouraged. Nonetheless, we would be
cautious in making radical changes to the R&D tax credits
scheme, which is currently seen as a success, particularly before
it has been properly evaluated. However, we strongly encourage
the Government to think about how it might better encourage innovation
beyond the current support for traditional R&D and particularly,
how it will encourage innovation in the service sector.
Intellectual property
112. The importance of intellectual property
(IP) to innovation and entrepreneurialism and the challenge of
properly protecting ideas have been discussed in a number of reports
over recent years.[133]
The Committee does not wish to replicate that discussion, but
appropriate protection for intellectual property is a critical
factor in encouraging the growth of the higher value-added economy
in the United Kingdom. The CBI told us that IP had become more
important in recent years due to the "high-value challenge.
If you are going to move up the ladder of high value and you have
the Chinese and the Indians chasing you up that ladder, it matters
hugely whether you can protect the thing that differentiates you
from your East Asian competitor".[134]
113. The Committee is also aware, however, that
attitudes to IP are changing in the increasingly fast-paced technological
market, where the emphasis is on getting a product onto the market
before competitors, and securing IP protection may not always
be the highest priority. It also recognises the implication of
product user innovation on goods. There are circumstances in which
copyright or patent protection is not appropriate. A company may
gain greater market advantage from trademark protection, branding,
or even foregoing protection altogether.
114. The Committee welcomes
the fact that responsibility for IP within government will lie
with the new Department for Business, Innovation and Skills. All
too often, intellectual property is seen as synonymous with patenting;
one of the tasks of the department should be to raise awareness
of the variety of ways in which such property can be protected.
115. Although these days many larger
companies have IP expertise, it is more difficult for SMEs to
protect their ideas.[135]
The Committee recognises the importance of intellectual property
to the development of a higher value-added economy and wishes
to see greater support for businesses in understanding and researching
their IP options. This challenge was identified by the British
Library and inspired it to re-launch its Business and IP Centre
in 2003 to provide support for businesses within the M25 (see
Case Study 3 for further explanation). The Committee was very
impressed with the centre when it visited it as part of this inquiry.
Similarly, the Intellectual Assets Centre in Scotland aims to
raise business awareness of the importance of managing intellectual
assets. We believe that the
British Library Business and IP Centre is providing an exemplary
service to the SMEs and entrepreneurs of the capital and we would
like to see this model replicated throughout the United Kingdom.
The Committee recommends that the Government secure the Centre's
long term funding to enable it to provide a service to business
people across the United Kingdom and provide funding for similar
centres in key business hubs within the United Kingdom.
Case Study 3: British Library
Business and IP Centre
The centre was designed to support entrepreneurs
and SMEs in the start up and development of a business. It provides
free access to information and advice on IP, market research,
and databases. It also runs events to encourage entrepreneurs;
and it acts as a hub for the Knowledge Transfer community in the
capital and many other businesses. The centre has exceeded all
its targets to give business advice and skills development by
a wide margin since it was re-launched in March 2006. It has links
with more than 50 service providers in the enterprise sector and
provides information to businesses in person, over email or on
the telephone. The objectives of the centre, agreed with the LDA
who fund the centre, include: promoting economic growth through
information and knowledge transfer; providing guidance and information
to SMEs and entrepreneurs on IP and the protection of innovative
ideas and promoting innovation; encouraging the creation of new
businesses and helping create new jobs within the M25; and regeneration
of the King's Cross area.
Public procurement
116. Estimates of expenditure on public procurement
vary but the Glover Committee review into strategic procurement[136]
estimated its worth at over £175 billion per annum, representing
13% of GDP.[137] QinetiQ
told us that the Government spends "between £125 billion
and £150 billion annually on procuring goods and services,
such procurement is widely recognised as potentially being a major
driver of innovation, through the Government creating a market
for innovative products".[138]
If used properly, public procurement could not only increase the
market for innovative products or services, but foster the collaborative
approach which allows higher value-added products and services
to be developed.
117. There are significant barriers to this.
QinetiQ said:
Previous procurement problems have made Government
even more risk-averse. This leads UK Government to procuring existing
technological solutions which it perceives are low risk and provide
value for money, thereby acting as a late adopter of technology.
As a result procurement contracts are placed increasingly frequently
with overseas companies (or with UK companies buying overseas
equipment) because they have been able to develop track record
with overseas governments who have been more agile in their procurement.
This leaves UK industry at a distinct disadvantage.[139]
Another criticism was that parts of the Treasury
and the Office of Government Commerce often interpreted the EU
procurement rules very conservatively.[140]
118. There are signs this conservatism is changing.
The report of the Glover Committee recommended that "Departments
should use their Innovation Procurement Plans to set out how procurement
aligns with their overall commercial strategy, encourages innovation
and gives advanced notice of long-term procurement plans"
[emphasis added] and "Government should encourage wider use
of outcome-based specifications across the public sector, as a
means of driving innovation".[141]
119. The Glover Report also contained proposals
to make the public procurement system more transparent and simpler,
so that it was easier for SMEs to access. These proposals were
accepted in the Pre-Budget Report (PBR) 2008, when the Government
said
The Government will advertise government contracts
worth more than £20,000 in a single free online portal, it
will introduce measures to reduce bureaucracy and will make opportunities
more transparent for small businesses. In addition, it will standardise
qualification criteria and encourage innovation by increasingly
specifying outcomes rather than prescribing solutions. It will
also help SMEs get a fair deal when they are sub-contractors.[142]
The Committee welcomes this move by the Government
and we hope that it produces tangible results for SMEs. The Committee
will continue to monitor the situation.
120. The Committee highlights
the vitally important role for public procurement in stimulating
innovation in the United Kingdom. The Government has an obligation
to use the large amount of money that it spends each year on public
procurement to stimulate innovation. We welcome the Government's
promise to accept the Glover Committee recommendations and look
forward to monitoring the results this produces for SMEs.
121. In its Report on public procurement, our
predecessors on the Trade and Industry Committee commented that
"Given competition from lower-cost countries, the Government
is anxious to encourage manufacturing industry to develop higher
value products, and to this end it aims to promote innovation.
The Government could use its purchasing power to support innovation".[143]
The Office of Government Commerce (OGC) has recently published
a guide to driving innovation through public procurement, which
"seeks to encourage public sector organisations to be intelligent,
demanding customers and open to new ideas".[144]
We welcome the OGC's guidance
on innovation and procurement; the difficulty will be to ensure
that departments and individual officials really understand the
ways in which procurement can support innovation, and are supported
in using procurement policy in this way. It will require the public
sector, and those who monitor its effectiveness, to take a balanced
approach to risk, rather than simply reaching for the tried and
tested way of doing things, because it is safer.
SMALL BUSINESS RESEARCH INITIATIVE
122. One way to reduce the risk that adopting
an innovative approach will expose an organisation or individual
to criticism is to have programmes explicitly designed to foster
innovation. Since the PBR 2008, the Government has set up a Small
Business Research Initiative (SBRI) in the United Kingdom. This
Initiative is championed by the Technology Strategy Board and
significantly reworks the previous scheme that was launched in
the United Kingdom in 2001. It is similar to the SBIR scheme in
the United States, which has been running successfully since 1982,
and which the Committee was briefed on in detail during its visit
to the USA last year. The programme aims to find innovative solutions
to specific public sector needs, by engaging a broad range of
companies in competitions for ideas that result in short-term
development contracts. These fully funded development contracts
between the successful company and the government department (usually
with an initial feasibility study and then more detailed product
development) should result in a commercial product or service.
It is a fast track, simplified process that allows government
departments to engage with businesses they would not normally
work with. The government department (or public sector body) acts
as the lead customer and is instrumental in helping the business
develop its product or technology.
123. The Committee welcomes
the establishment of the SBRI in the United Kingdom and hopes
that it will play its part in fostering a true spirit of innovation.
The Committee also recommend that the Government use a larger
part of the public procurement budget to invest in riskier, high
payoff projects that will help to stimulate a change of culture
within government departments and in the UK economy. Such a policy
may be considered courageous in the prevailing climate, but the
example of DARPA in the USA shows the value of such courage.
Access to finance
124. The availability of finance to support both
new start-ups and established companies has been widely discussed.
Indeed, this is something that we are monitoring actively in our
current work.[145]
We do not attempt to deal with the subject in detail here, simply
to draw attention to a few key points. As we noted at the beginning
of this Report, the US benefits from a well-developed venture
capital industry. There are individual business angels in the
United Kingdom, and a range of venture capital funds. Nonetheless,
while venture capital accounts for 33% of investment in the US,
it accounts for only 4% in the United Kingdom.[146]
In particular, there is a funding gap for businesses that need
sums under £2 million.
125. There are measures to support very early
stage businesses. NESTA invests about £10m per year into
early stage companies, but recognises that this will not transform
the market. However, it may draw others into the market by demonstrating
the returns which can be made.[147]
Similarly, Scottish Enterprise's Proof of Concept scheme helps
researchers to export their ideas and inventions from the lab
to the global marketplace, usually after a background patent has
been filed, but before full scale development of the technology
or commercial backing.
126. The state was readier to support industry
in the past. In 1945, the Bank of England established the Industrial
and Commercial Finance Corporation (ICFC) to provide capital to
small- and medium-sized companies; this was privatised and became
3i, which was reported to have moved out of technology start ups.
Earlier this year, the Government established the Capital for
Enterprise Fund, a £75 million fund, with a contribution
of £50 million from government and £25 million from
the banks. When she gave evidence to us on 12 May, Baroness Vadera
hinted that more might be done.[148]
- On 29 June 2009, the Government launched the
UK Innovation Investment Fund in which the Government will invest
£150 million, to be matched by private industry. It is hoped
that this will leverage enough private investment to build a fund
of up to £1 billion over the next 10 years.[149]
We welcome the launch of the UK Innovation Investment Fund,
although only time will tell whether the investment from the Government
will leverage all the money required.
116 HM Revenue & Customs website on R&D tax
credits, available at: http://www.hmrc.gov.uk/randd/ Back
117
Statistics available at: http://www.hmrc.gov.uk/stats/corporate_tax/randdtcmenu.htm Back
118
Summary of CDI survey taken from Department for Business, Innovation
and Skills website on R&D tax credits. Rounding figures to
the nearest £10 million has caused the sum of some figures
not to equate. Back
119
Ev 211 [Institute of Physics] Back
120
Ev 217 [NESTA], see also Q 124 Back
121
Ev 290 [Universities UK] Back
122
Q 124 Back
123
Ev 152 [CBI] Back
124
Ev 153 [CBI] Back
125
Ev 210 [ICAEW] Back
126
Qq 249, 250 Back
127
Q125 Back
128
Q 130 Back
129
Ev 217 [NESTA] Back
130
Ibid. Back
131
Q 430 Back
132
Ev 147 [CBI] Back
133
Including HM Treasury (2006) Gowers Review of Intellectual
Property and Lambert Review of Business-University Collaboration.
Back
134
Q 444 Back
135
Q 220 Back
136
HM Treasury (November 2008) Accelerating the SME economic engine:
through transparent, simple and strategic procurement Back
137
Accelerating the SME economic engine through simple and strategic
procurement, p3 Back
138
Ev 228 [QinetiQ] Back
139
Back
140
Q 393 Back
141
Accelerating the SME economic engine: through transparent,
simple and strategic procurement, p5 Back
142
Pre-Budget Report 2008, Chapter 4, available at:
http://www.hm-treasury.gov.uk/d/pbr08_chapter4_136.pdf Back
143
Thirteenth report of the Trade and Industry Committee of 2006-07,
The future of manufacturing: public procurement (HC 1109) Back
144
Driving Innovation Through Public Procurement, OGC and BIS, available
at: http://www.ogc.gov.uk/documents/OGC09-0679_InnovationBrochure.pdf Back
145
Business and Enterprise Committee, Ninth Report of Session 2008-09,
The Automotive Industry in the UK, HC 550; Tenth Report
of Session 2008-09, Enterprise Finance Guarantee scheme,
HC 588 Back
146
"Mandelson issues venture funding challenge", Reuters,
11 March 2009 Back
147
Q 144 Back
148
HC 143, Q 240 Back
149
"Government aims for £1 billion venture capital fund
to invest in the businesses of the future", Department for
Business, Innovation and Skills press release, 29 June 2009 Back
|