Accounting rules switch uncovers 'lost' £1bn R&D

New accounting rules have uncovered £1bn of R&D investment that had hitherto gone unrecorded, an annual survey of UK businesses shows today.

UK firms raised their budget for research and development by 13 per cent last year despite a sudden drop in expenditure for foreign-owned figures, the Department of Trade and Industry said.

Total spending on R&D jumped to £19.2bn last year from £17bn in 2004. The increase was a rebound from the previous year, which saw a 1 per cent fall between 2003 and 2004.

However, the increase was distorted by the introduction of new accounting rule that insisted on a higher level of disclosure in sectors not traditionally associated with R&D. The DTI said six companies had added £1bn of previously unrecorded R&D, including: £329m spent by Royal Bank of Scotland; £245m by the investment bank HSBC; £122m at the insurer Royal & Sun Alliance; £115m by supermarket behemoth Tesco; and £102m by the publishing group Reed Elsevier.

The finding were published in the R&D Scoreboard, produced annually by the DTI's business, finance and investment unit.

Mike Tubbs, a senior industrialist and lead author of the report, said: "For the first time we had R&D from these companies. We knew they did R&D but we did not know it was that much."

But he added that there had also been a genuine rise of £1.2bn in R&D spending, which was led by the UK's fast-growing aerospace, pharmaceuticals and software. The increase in R&D spending has followed a year of strong economic growth, record companies profits and a continued environment of historically low interest rates and inflation.

Lord Sainsbury, the Science minister, said: "R&D plays a key part on business, and demonstrates the ever-widening relevance of innovation, and the R&D that goes into its creation for companies large and small.

"The UK is an attractive location for R&D activities and companies are increasingly recognising the benefits of the UK as a productive environment for R&D investment."

He acknowledged that global competition was strong and said the Government was committed to making the UK a leading location for science and innovation. The report showed that two-thirds of R&D was concentrated in five sectors - pharmaceuticals, aerospace, automotive, technology hardware and computer software. The top 100 out of its survey of 800 made up 85 per cent of the total.

There was a marked convergence between UK-listed companies which increased R&D by more than 8 per cent over the previous year and foreign-owned firms that cut their budgets by 9 per cent. However, three companies accounted for most of that decrease, including a 45 per cent drop at Pfizer, which the company said was due to a new system of accounting.

The DTI said the report showed that the UK had more companies involved in very high intensity of R&D, as a proportion of sales, than its continental rivals.

About 18 per cent of UK companies spend between a 10th and a fifth of their sales on R&D compared with about 8 per cent in the rest of the European Union. Again, 8 per cent of UK firms spent at least a fifth of turnover compared with about 5 per cent in the EU.