Incentives for research could close development gap with US

Improved tax incentives to boost research and development were promised yesterday in an effort to bridge Britain's productivity gap with America and other rivals.

"Two-thirds of the productivity gap with America is due to the poorer quantity and quality of innovation. So it is a priority to raise R&D from today's 1.9 of GDP towards America's 2.8 per cent," Gordon Brown said.

A consultation process has been initiated aimed at improving the current guidelines on research and development and designed to ensure it is better defined to cover a broader range of activities. The process, likely to take several months, could prove of particular benefit to software companies.

Andrew Bell, of PricewaterhouseCoopers, said: "There have been a lot of problems in getting software companies' claims agreed with the Inland Revenue, mainly because the definitions of what qualified has relied upon there being some degree of novelty or uniqueness." Since R&D work in the software sector often entailed building on existing technology, that meant some claims had been borderline, he said.

Software companies, in particular, stood to gain from changes in the treatment of freelance IT workers since they typically hired large numbers of IT contractors.

The Chancellor said he had asked the Inland Revenue to report on further help for already tax-exempt research and technology organisations.