Government tax breaks fail to stop fall in R&D spending

Spending on research and development by British industry is falling for the first time in a decade despite the introduction of generous government tax credits designed to encourage more investment.

Spending on research and development by British industry is falling for the first time in a decade despite the introduction of generous government tax credits designed to encourage more investment.

The total amount spent on R&D last year by Britain's 700 largest companies was £16.6bn - a reduction of 1 per cent on the previous year, according to the latest annual R&D scoreboard from the Department of Trade and Industry.

Although the decline is small, it will disappoint ministers who had hoped that the new tax incentives, which were introduced by the Chancellor in 2000 and 2002, would stimulate increased R&D activity among UK firms.

The latest DTI figures came as a survey by the Economist Intelligence Unit showed that European companies are planning to reduce the amount of R&D that they carry out within the European Union over the next three years.

The survey of 172 big manufacturing companies, carried out on behalf of KPMG International, found that the proportion of R&D undertaken within the EU was expected to fall from 55 per cent to 49 per cent.

Apart from the decline in the absolute level of R&D spending, the DTI's 2004 scoreboard also shows that UK industry is failing to close the gap with its international rivals in relative terms as well.

R&D investment as a proportion of sales - or R&D "intensity" as it is known - was 2.3 per cent among larger UK companies compared with an average of 4.2 per cent among their international counterparts. In the US the figure was more than twice that of the UK at 4.9 per cent whilst it was 4.3 per cent in Germany and 4.2 per cent in Japan.

Officials attributed the discrepancy to the fact that the UK has a small presence in the IT and electronics sectors - where R&D spending proportionate to total sales is generally very high - but a strong presence in oil and gas, through companies such as BP and Shell, where capital expenditure tends to be more important than R&D.

They also pointed out that the slight fall in UK spending last year was caused by reduced investment by a handful of big companies. The amount spent by Ford UK, for instance, fell by £100m, whilst spending was 40 per cent lower at Marconi and down 12 per cent at BT, 9 per cent at Unilever. The R&D budget of GlaxoSmithKline - far and away the UK's biggest spender - fell 5 per cent last year to just under £2.8bn.

R&D spending among the 700 biggest companies internationally was up 2 per cent to £204.6bn. The largest single investor was Ford, the US car maker, with a budget of £4.2bn. It was followed by Pfizer, the American drug company, on £4bn.

Under the UK fiscal incentives introduced over the past four years, large companies can set 125 per cent of the R&D spending against tax, while the figure for small businesses is 150 per cent.

Dr Mike Tubbs, a senior industrialist with the DTI's business, finance and investment unit and one of the compilers of the scoreboard, said that UK companies might have used the tax incentives to maintain spending last year when they were under pressure to cut discretionary expenditure in the face of the harsh economic climate.

KPMG said that it was alarmed at the prospect of a gradual reduction in Europe's R&D effort, saying it was crucial to retain competitiveness on a world scale.

Harald von Heynitz, the head industrial manufacturing practice at the accountancy firm, said: "It is quite clear that we must hold on to the high ground of value and innovation."

The DTI scoreboard bears this out, highlighting the fact that companies which have higher levels of R&D spending have enjoyed greater share price growth over the past seven years.