By Max Clarke

Research and development (R&D) tax credits were introduced to provide a financial incentive for small and medium businesses to spend proportionally higher sums on R&D, ensuring that UK business retains its competitive edge in a rapidly changing global marketplace.

Following an extensive review of the system which opened on 29th November 2010, as a part of the Dyson report on making Britain inventive, the Treasury consultation on the future of the R&D tax credits system ended today.

John Dethridge, Tax Partner & specialist in R&D tax reliefs at Menzies comments on the prospects for change in this important tax policy:

"It seems unlikely there will be major changes to the taxation of innovation and intellectual property (IP) tax relief as the Government is satisfied with the effectiveness of the current Research and Development Tax Credit regime. This encourages early stage research and follow up development where technological uncertainty exists. However, further consultation will follow in spring on the proposed new Patent Box.

“This is being proposed to improve the tax regime beyond the R&D stage, when the product is complete and the IP created is generating an income stream. Many other countries have a reduced tax rate for such income and the UK is currently seen by many corporate investors as uncompetitive, leading to IP being located in other tax jurisdictions, with potentially damaging implications for tax revenues and for the UK economy.

“Any improvement in the taxation of IP is to be welcomed, but we are some way off seeing what the finished article will look like. Some IP is not patented, and it seems this may be overlooked altogether. The identification of embedded patent income may also prove to be far more complex than anything in the current R&D tax credit claim process. Specialist tax advisers are going to be needed to ensure that taxation of innovation is minimised."