Sarah Green column

The design industry has greeted a decision to allow the UK arm of Nissan to claim tax credits on part of its design investments as a breakthrough that could support businesses developing new products and make the UK more attractive for innovation and design investment.

The design industry has greeted a decision to allow the UK arm of Nissan to claim tax credits on part of its design investments as a breakthrough that could support businesses developing new products and make the UK more attractive for innovation and design investment.

This decision highlights a previously grey area in the law over where research and development ends and the design process begins. It also mirrors a recommendation of last year's Treasury-commissioned Cox Report into creativity in business that called for greater use of tax incentives to promote R&D. The report said the UK spends a lower percentage of GDP on research than France, Germany, Japan, Sweden and others.

After successful CBI lobbying in 2002, the Treasury introduced an R&D tax credit available to all companies on spending incurred.

This was a significant step forward in helping to encourage companies to engage in R&D and innovation more widely, but on its own is not a panacea for the deep-rooted under-investment problem.

Although business in the UK invests £16bn annually in R&D, the UK business R&D intensity (R&D as a proportion of sales) is still only half that of business in the US.

While the tax credit rate is 25%, which incorporating incentives means each £100 of qualifying R&D conducted in the UK could now cost as little as £62.50, the impact of the credit has been limited, mainly because its interpretation and application on the ground vary.

This decision to broaden the definition of development costs is now being researched further to see if it can be applied to SMEs. This is particularly important as the Cox Review highlighted that businesses with 50 or fewer employees are less than half as likely to spend on R&D than those with 500 to 1,000 and that 60% of UK companies have not launched a new product or service in three years.

The CBI continues to work with the Treasury, HM Revenue & Customs and DTI on the definition of R&D used for tax credit purposes and it is likely that there will be further focus on the application of the tax credit as part of the comprehensive spending review process.

The results of these discussions will be closely watched in the North-East as they could provide a welcome boost to the process of attracting international research to Science City in Newcastle.

 

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