CALL for US-Style Innovation Was One of the Clearest Messages to Come out of Gordon Brown's Budget on Wednesday, as the Chancellor Unveiled Plans to Expand Tax Credits for Research and Development (R&D)

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CALL for US-style innovation was one of the clearest messages to come out of Gordon Brown's Budget on Wednesday, as the chancellor unveiled plans to expand tax credits for research and development (R&D). Brown's grand ambition, however, may not be matched by reality as many companies believe his plans have gone little beyond tinkering at the edges.

A good part of the chancellor's speech was devoted to the fact that Britain's poorer quantity and quality of innovation is to blame for the country's productivity trailing that of the US by up to 30%. The new proposals on R&D tax credits, he argued, are designed to help increase Britain's productivity record, with the aim of raising it from today's 1.9% of GDP towards America's 2.8%.

Under the plans, science, and stem cell research in particular, will receive more investment, with the Inland Revenue due to investigate ways to give further help to organisations that already conduct tax-exempt research. The Treasury will also consult business to improve the definition of research that qualifies for the credits.

One of the key proposals was the announcement of a consultation on the definition of R&D, a move that comes after lobbying by a number of industry stakeholder groups who felt the existing definition was too restrictive.

Brown also announced that R&D credits will be extended to companies spending a minimum of pound sterling10,000 on R&D, down from pound sterling25,000. In addition, expenditure on certain software will be covered by the credit, as will the cost of staff not employed directly by the company claiming the credit, something which businesses had been pushing for.

Though the move will undoubtedly give British innovation and its science base another welcome boost, small companies are expected to reap the main benefits. For many of the larger businesses Brown's proposals are little more than a fine-tuning of the existing system.

Crucially, the government's own figures indicate as much, showing that the impact of the new proposals will be much more limited than last year's announcement, when Brown unveiled the initial pound sterling400m (E580m, $624m) R&D tax credit. A cost of pound sterling20m this year will rise to pound sterling50m in 2005.

Nor will the level of bureaucracy, always a bugbear for small companies, be reduced. David O'Keefe, a tax partner in KPMG and head of its R&D tax relief unit, welcomed some of the smaller changes but believes the measures will ultimately not reduce the high level of bureaucracy attached to the tax credits. …