Brown bolsters R&D credits

The chancellor hopes budget changes will ensure R&D accounts for 2.5 percent of GDP by 2014

Chancellor Gordon Brown gave his eleventh and final budget today, pledging to double investment in science, encourage greater cooperation between business and universities on high tech projects, and increase R&D tax credits for UK firms.

Brown said public investment in science would increase from £5bn this year to £6.3bn by 2010-11 and unveiled a new £100m high-tech innovation initiative designed to encourage universities and businesses to work closer together to " convert British scientific breakthroughs into British commercial success and jobs".

With the government aiming to ensure R&D accounts for 2.5 percent of GDP by 2014, Brown also said that the value of R&D tax credits would increase by £100m. The tax credit rate for small and medium-sized businesses (SMBs) will increase from 150 to 175 percent and the same rate for larger firms will increase from 125 to 130 percent, both from April 2008.

Diarmuid MacDougall, partner for R&D tax relief at consultants PwC, said the changes "were very welcome enhancements" to the R&D tax credit scheme. "The after-tax cost of businesses doing R&D in the UK will be significantly lower after these changes take effect," he added.

Tom Wills-Sandford, deputy director general of IT trade group Intellect, also welcomed the changes, claiming that they should provide greater incentive for SMBs to invest in R&D and help create stronger knowledge transfer networks between businesses and universities.

However, Wills-Sandford argued that with many costs involved in an R&D project ineligible for the credit, and corporation tax still being applicable, the real value of the increased R&D tax credit for larger firms is about four percent – an increase of only half a percentage point. "If you are a large multinational sitting in New York, is half a percent more R&D tax benefit going to encourage you to come [to the UK]? Probably not," he said.

Separately, Brown also confirmed the Treasury would "act to deal with individuals artificially incorporating as small companies to avoid paying their due share of tax" – a practice that has been adopted by some IT freelancers who have joined so-called Managed Services, or Composite, companies in an attempt to avoid paying employed levels of tax and national Insurance.

However, in an attempt to ensure that freelancers are fully prepared for the new tighter legislation, the Treasury has said it will delay some elements of the rules until January 2008, and has also tightened the definition of a Managed Services company (MSC) to ensure recruitment agencies are not impacted by the legislation.

The moves were welcomed by Jeff Brooks of the Recruitment and Employment Confederationwho said the changes would help ensure that recruitment agencies were not affected and allow them to assist their contractors in deciding about how to best cope with the new rules.

Experts have previously advised freelancers signed up to MSCs to either set up their own limited company or join a umbrella company that taxes them on a PAYE basis.