Budget 1999: Innovation Funding - Tax credits to help pay for research

The Budget and Business

A MAJOR theme of the Chancellor's speech was the need for British companies to innovate. "Scientific innovation is a prime catalyst of growth," he said, raising the prospect of "a winners' circle of innovation" where British firms would not only invent new products but also take responsibility for their development and manufacture.

To support this vision, the Government announced a series of specific measures designed to encourage companies to develop new products and services. As with a raft of other measures, however, the detail of the new policies would not be published until today.

For example, the Chancellor announced a plan to give to start-up and small businesses through a research and development (R&D) tax credit, which would underwrite a third of their research and development costs.

The tax credit, to be introduced in the finance Bill next year, will reduce the after-tax cost of R&D for tax-paying companies by 12.5 per cent.

Andrew Bell, a high-tech specialist with the accountancy firm PricewaterhouseCoopers, pointed out that start-up companies that were investing heavily in R&D - biotechnology firms for example - were unlikely to be making any profits against which they could offset their tax credits.

For these companies, the credit will reduce the immediate cash cost of R&D by 24 per cent. In return for this tax credit payment, such companies will no longer be able to carry forward their R&D costs to offset against future profits.

But entrepreneurs pointed out that not many small businesses could afford to invest heavily in R&D unless they had specifically raised money to do so.

And the costs of many start-ups - such as the new Internet businesses bursting on to the scene - are more likely to be marketing and market research costs rather than pure R&D.

"If you're an Internet company, most of your costs are service," said David Stroud, managing director of sparesfinder.com, an Internet start- up. "If you're doing actual research you've got to be quite large."

The Chancellor also introduced several measures to stimulate R&D in universities. The Government is spending an extra pounds 100 million on the joint infrastructure fund, the challenge fund that is jointly funded by the Government and the Wellcome Trust.

The additional funding will come from the Higher Education Funding Council of England. The JIF will renew the capital base of science, with up- to- date laboratories and equipment.

Meanwhile, an additional pounds 15 million will be added to University Challenge - a fund designed to commercialise university science - taking the fund's value to pounds 65 million.

Small firms will also get help from a new small business service, which will offer support and advice to companies that need help in complying with existing regulations.

The service, which will be recruiting a high-profile chief executive, will offer practical help to companies - an automated payroll service for example - while offering loan guarantees. Small firms filing their tax returns electronically will also receive a tax incentive.