In a paper submitted to the Treasury, the CBI called on chancellor Gordon Brown to ‘adopt a volume-based approach’ to R&D tax credits and that all expenditure on R&D in the UK should qualify’.
And it warned that giving credits for additional R&D expenditure only would not help companies that regularly invested large amounts of money in innovation.
The Treasury has proposed an incremental R&D tax credit for larger companies, based on expenditure exceeding average levels, to be introduced in the next Budget, adding to the 30% R&D tax credit currently available to all SMEs.
But according to the CBI, the ‘incremental approach’ would act as a deterrent to companies investing in R&D, forcing them to ‘wrestle with a complex formula for calculating the credit that might be available’.
The confederation said a ‘volume-based approach’ would be of most benefit to innovation-driven sectors, and would be vital to ensuring the UK continued to compete in the ‘knowledge-driven economy’.
John Cridland, CBI deputy director-general, said there was ‘overwhelming support’ for R&D tax credits, but said companies wanted ‘an incentive that encourages high-levels of sustained investment, not a series of peaks and troughs’.
Any credit, he said, needed to be set at a meaningful level.
But, the CBI admitted its volume-based approach would be more costly than an incremental approach. With business spending £13bn a year on R&D, a 5% across-the-board tax credit would cost the Treasury £650m, while a 10% credit would cost £1.3bn.
The Institute of Fiscal Studies has estimated that under the Treasury’s proposal, R&D tax credits would cost between £70m and £130m.
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