Budget benefits innovative business

This is a positive measure for fast growing innovative companies.

Kevin Nicholson
Head of private companies
PricewaterhouseCoopers

In a competitive environment, a country’s tax system is an important factor for a business to take into account when making an investment decision.

With a headline corporation tax rate of 30 per cent, the UK remains attractive in Europe with only the Republic of Ireland, Sweden and the Netherlands more favourable.

However, to encourage a broader business base, tax incentives should benefit more than the big corporations.

The 2006 Budget reaffirms the UK’s commitment to all business in two major respects: practical help for medium-sized firms involved in innovation and reducing the administrative burden of the tax system.

The significance of the R&D culture

International research has found that investment in R&D is key to achieving higher productivity.

David Cobb, R&D solutions partner at Deloitte & Touche, says, “In order simply to stay ahead, most companies, in most sectors, are involved in some technological advance.”

Recognising this, and following on from the ‘Cox Review of Creativity in Business’, which was commissioned to find how best to enhance UK business productivity, new proposals to extend the R&D tax scheme were announced.

Currently, firms of up 250 employees can claim 150 per cent of qualifying expenditure against their taxable profits with loss-makers able to claim back 24 per cent of related costs as a cash credit.

But for firms of more than 250 staff, this is limited to 125 per cent of expenditure with no cash credit.

Tax breaks for bigger companies

Subject to European Union approval, both the higher rate and cash credit will be extended to firms involved in R&D that employ up to 500 staff.

Since the scheme was introduced, the UK Government has supported business in this way by spending over £1.3 billion, a figure that will increase as more companies are able to qualify.

Yet the move gained mixed reactions.

Malcolm Edge, chairman UK tax and people services at KPMG, was disappointed that the “R&D changes provide no benefits for larger companies who undertake most of Britain’s research and development.”

But Kevin Nicholson, head of private companies at PricewaterhouseCoopers, embraced the changes.

“We welcome the doubling of the headcount threshold at which companies are able to claim the valuable R&D credit, easing funding pressure as they grow. This is a positive measure for fast growing innovative companies,” he said.

Making the tax system simpler

Tax rates are not the only hindrance to business: complexity of systems and resultant administration costs also have a significant effect.

Contrary to some business complaints, independent evidence shows the UK as having a relatively easy system ranking fourth behind only the Republic of Ireland, Spain and the Netherlands for simplicity and transparency.

However, recent studies show that it still costs business around £5 billion per year to comply with its tax obligations.

Accepting that this is a significant burden, targets to reduce the time spent on forms and returns and dealing with audits and inspections over the next five years have been set.

A review of HM Revenue & Customs’ relationship with business has also been commissioned.

Sir Digby Jones, director-general of the CBI, says, “The new review, coupled with the consultation on the simplification of the tax process, will be important steps towards restoring business confidence.”