Research and Development: Value of R&D tax credits for companies to increase in 2008

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The Independent Online

Companies with fewer than 500 employees will see the amount of tax relief they can claim back on research and development treble.

The Chancellor is increasing the value of R&D tax credits for small and medium- sized companies (SMEs) to 175 per cent from 150 per cent. Large companies - with more than 500 on the payroll - will see their rate of relief edge up to 130 per cent from 125 per cent. The changes will take effect in early 2008.

In a related move, Gordon Brown said companies with up to 500 employees would be eligible for the top rate of tax relief. Previously, it was limited to companies with workforces of less than 250. The Treasury is awaiting permission from the European Commission, which has strict state aid approval rules, before it acts.

Switching to the new regime will cost the Government £70m next year and £150m in 2009, figures released yesterday showed.

Tax experts queried the efficacy of the R&D tax relief scheme. Kevin Nicholson, head of entrepreneurs and private companies at PricewaterhouseCoopers, said: "The issue is whether companies actually go through the added burden of claiming it." A PwC study last year found that a third of firms eligible for the R&D tax credit did not bother because they felt the process was too complicated.

Stephen Quest, tax partner at Grant Thornton, said: "There is no evidence that the £1.8bn spent on these tax credits since 2000 has had any effect on the level of innovation in the UK. We question whether this amount would not be better spent on a genuine reduction in the rate of corporation tax for all UK companies."

David Frost, director general of the British Chambers of Commerce, said it was worried the increase in tax credits would be offset by increased tax on SMEs' profits.