Memorandum submitted by the Institute
of Chartered Accountants in England and Wales (ICAEW)
1. ICAEW
Chartered accountants play a key role
in decisions around research and development, capital and budgets
for training of staff. They understand the link between investment
and business growth. The ICAEW has over 130,000 members worldwide,
including over 50,000 who work in a direct business capacity.
Our members are often industry specialists allowing them to play
key roles in the City, in high tech science and innovation industries,
in small business start-ups and many other types of business.
In their roles as advisers, on issues such as tax and finance,
they are also key witnesses to the state of the UK economy in
increasingly competitive global marketplace.
2. SUMMARY
OF ICAEW RECOMMENDATIONS
FOR GROWING
THE HIGH-VALUE
ECONOMY
The ICAEW believes that high-value economic
growth in the UK, achieved through business innovation, requires
the Government to act threefold: to address the domestic high-skills
shortage; to adjust the research and development (R&D) tax
credit system to make it more effective for SMEs; and to ensure
that tax policy is characterised by sound principles and stability,
so that long term business investment and research plans can be
made with confidence.
i) Skills policy
Policy streams must be rebalanced so that initiatives
to raise basic-skills and to improve high-level skills both run
in parallel. We would welcome Government engagement with business
in meeting the high-level skills challenge.
ii) R&D policy
HM Treasury should examine proposals to make the
R&D tax system more effective for SMEs, including:
1. Simplifying the criteria for identifying expenditure
that qualifies as R&D, particularly for those seeking lower
levels of tax credit. One approach might be to align the HMRC/
DTI definition (12 pages) to the accounting definitions of R&D
(less than 1 page), even if only for smaller claims. This could
lower the costs of making an application and reduce the need for
small businesses to develop or pay for specialist advice about
what HMRC would accept as R&D.
2. Removing the £10,000 lower limit for R&D
expenditure to be eligible for the tax credit incentive. Encouraging
start-ups to invest in R&D by allowing small R&D claims
could make a major contribution towards developing a greater investment
culture across the economy.
iii) Tax policy
If the UK is to maintain its pre-eminence
as an international centre of business, tax policy formulation
needs to allow adequate time for consultation with a wide variety
of stakeholders and must ensure that the reasonable expectations
of taxpayers are preserved.
The Small Business Review: There have been a number
of attempts to review the taxation of small businesses, but progress
has been slow since the publication of the discussion paper, Small
Companies, the self-employed and the tax system, in December
2004. In our opinion, this is a wasted opportunity. We believe
that the Government should re-energise this process as a matter
of urgency. The aim should be to remove the tax distortions between
different business structures so as to ensure that business decisions
are led first and foremost by the commercial needs of the business
rather than dictated by tax advantages or disadvantages.
Residence and domicile proposals: Firstly,
the Government should defer some of the more complex measures
outlined until 6 April 2009. Secondly, the government should consider
raising the de minimis limit for unremitted income and
gains and defer consideration of any future changes until the
current proposals have been assimilated and the full effects have
been quantified. Our detailed representation on the legislation
highlights the areas which we consider will require drafting amendments
to make them clear and workable.
3. ICAEW POLICY
BACKGROUND
i) Skills for the high value added
economy
Productive innovation and high-value
growth requires high-level skills. Although Government has set
goals for improving basic skills, it is the lack of leadership
and management skills in the workforce that presents a key concern
to businesses of all sizes is, with the shortage of specialist
and technical skills as an acute problem. In our 2007 Enterprise
Survey, whilst a large number of respondents cited a lack of basic-skills
as a "critical to moderate" barrier to future growth,
significantly more businesses believed high-level skills, including
leadership and management skills, constituted the main barrier
to business growth. Over 95% of businesses believed that inadequate
high-level skills were either a "critical" barrier (30%)
or a "critical to moderate" barrier (65%) to growth.
UK innovation would benefit from an emphasis on improving high-level
skills, including leadership and management resources, in the
UK economy. The ICAEW believes that effective policy thinking
on increasing innovation should be framed within an appreciation
of the importance of highly skilled people operating under sound
management.
ii) Improving the effectiveness of
R&D tax credits
The March 2007 ICAEW Centre for Business Performance
(CBP) report, The Role of Tax Incentives in SMEs and Research
and Development Decisions produced in collaboration with the
University of Nottingham and Manchester Business School, sought
to determine whether the R&D tax credit system was encouraging
new investment or simply rewarding that which was already planned.
Interviews with SMEs and CBP polling confirmed that the majority
of SMEs do not consider tax credits before they choose to invest
in R&D.
When you plan your R&D expenditure do you take
into account the tax credit/ or R&D-related capital allowance
your firm is entitled to?
|
| Answer | R&D Tax Credits
| R&D Capital Allowance |
|
| No | 102(72.34%) | 119(84.39%)
|
| Yes | 39(27.66%) | 22(15.61%)
|
|
| |
|
However, 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.
— In estimating the cost of applying for
the tax credit, 60% of respondents said about £1,000, 9%
estimated £2,000, 7% estimated £3,000 and 2% suggested
costs in excess of £10,000. the remainder received the service
as part of a wider package. Noting that the lower limit of expenditure
which qualifies for the R&D tax credit is £10,000, which
would result in a theoretical 9.5% reduction in cost, the benefits
of the credit to smaller claims may be marginal.
— The uncertainty for SMEs of having their
application for an R&D tax credit approved is a considerable
issue. Most respondents in the CBP research said they were "not
at all" confident of success of securing R&D tax credit.
The average level of confidence for the incentive was less than
50%. A business might not know if its claim will succeed until
21 months, or possibly longer, after taking the decision to invest.
This lack of confidence is particularly problematic for smaller
businesses, although the introduction of specialist HMRC R&D
units has reduced uncertainty.
iii) Business tax conditions for innovation
More generally, innovation, long-term R&D investment
planning, and consequent progression up the value chain for UK
businesses requires a tax regime that provides stability and reasonable
certainty.
However, we are concerned that instead of providing a clear direction
for small business taxation, a sector that finds R&D tax credits
the least effective, the Government is generating piecemeal tax
changes that are being made in a reactive way. During recent years
we have seen legislation aimed at solving perceived abuses such
as the IR35 provisions, the Managed Service Companies legislation
in 2007 and now the Income Shifting proposals published in December
2007. Each of these carries a considerable administrative burden
and when added together they appear likely to act as a deterrent
to business growth, without raising significant revenue for the
Exchequer.
In addition, the current residence and domicile tax
proposal announced in the 2007 PBR threatens the appeal of the
UK as a place of work for a significant proportion of highly-skilled,
and innovative, mobile workers based in this country. The UK should
seek to publicise and promote itself as an attractive home-location
for such individuals and creative networks. The ICAEW believes
that the Government must act to reassure this community that the
UK remains an attractive location for internationally mobile workers.
18 February 2008
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