Industry bodies have come down against the government's preferred scheme for extending R&D tax credits to all companies. And they say the definition of R&D needs to be reviewed, otherwise extending relief will have little effect.
The Federation of the Electronics Industry (FEI), which made its submission to the Treasury public this week, and the Confederation of British Industry (CBI), which will not publish its submission until week beginning 18 June — but which Electronics Times has obtained a copy of — are arguing against an incremental scheme, which gives tax relief in proportion to the amount by which a company increases R&D in a year.
Instead the FEI and the CBI favour a volume scheme, which rewards all R&D expenditure.
The government proposed in March's Budget to extend R&D tax credits to all companies — not just SMEs.
While it favoured an incremental scheme as the strongest incentive to increase R&D, it admitted it would be complicated to adopt, as it requires a baseline, and needs to take account of groups of companies.
Consequently the proposal was opened to consultation on whether a volume scheme would be better.
In its submission, the FEI argued an incremental scheme would be difficult to administer, that multinationals would be unsure whether their spend would be incremental, and that companies already investing a lot in R&D would not benefit.
It said a volume-based scheme, shown to work in Canada — which actually changed from an incremental scheme 15 years ago — offered clarity, certainty and simplicity.
It said: "An incremental credit will not succeed in influencing R&D investment decisions. Government should invest in a system that meets the needs of industry — that means a volume-based scheme with a significant rate of relief."
It advocates a net rate of 15%, which it says would be worth £1.95bn per year.
Tom Wills-Sandford, director of information and communications technology at the FEI, said: "The majority of trade groups I've talked to are coming down on [the side of] volume."
The CBI's submission said an incremental option would "send the wrong message about support for innovation in the UK as a whole at a time when incentives to keep R&D in the UK are clearly needed".
The complexity of such a scheme would make it "virtually impossible for an R&D manager to determine the ultimate post-tax cost of an R&D project", it went on, and said an incremental scheme would effectively ignore those companies who already do a lot of R&D here but won't necessarily increase their spend each year.
On the other hand, the CBI said a volume-based scheme would be "simpler to implement, expresses support for all R&D activity, and would be an incentive for continued investment, even in periods when economic conditions are tight".
It went on to say all R&D expenditure should qualify, not just the labour costs portion.
Both the CBI and the FEI said the issue was of crucial importance in influencing companies decisions on where to locate R&D.
The FEI's backing of a volume scheme represents a u-turn for the body — two years ago it advocated an incremental scheme.
Wills-Sandford told ET: "You have a good memory. I think we did it because we thought it was the only way you could get the Treasury to accept it. It was the initial position to persuade the Treasury to look at it. Now they've accepted it, we have looked at it in more detail and have talked to the Canadians."
He told ET about the FEI's meeting with the Treasury in May: "We had some very big companies there who do a hell of a lot of R&D, including someone from Nortel [Networks] who'd flown in from Canada.
"The Inland Revenue seemed more concerned to keep it as incremental, but the Treasury people were listening and showing a bit more flexibility."
The FEI joined the CBI's earlier calls for a review of the definition of R&D, reached only last year in the Finance Act, as its focus on Blue Skies research would exclude real development of commercially viable products.
The CBI's submission to the Treasury said the current definition is "far too restrictive. For instance, much software development and many advances in manufacturing technology are excluded."
But Wills-Sandford of the FEI said the suggestion that a new definition might be needed was not met well: "To be quite honest it wasn't received that well, and as much as they were sheltering behind international agreements [of a definition], we have seen the US and Canada change it so why can't we. Both the IR and the Treasury were understanding but not a lot of sympathy."
Whatever is decided, the aim is for the extension of tax credits to all companies to be in place by the next Budget. But perhaps the last word should go to the CBI, which said: "In this climate, and with so much to change, an R&D tax credit is not a panacea."