Hi-tech firms lobby for tax breaks on R&D

Bank of England officials and hi-tech research companies are holding confidential talks which could lead to significant tax breaks for some of the UK's fastest growing businesses.

Sameena Ahmad examines a set of potentially controversial proposals.

The UK's high technology industry is lobbying the Treasury to introduce a new system of tax credits to help finance its research and development. A working group, set up last month by the Treasury and Department of Trade and Industry to examine practical ways to improve the UK's record of investment in research and development, met for the first time last Thursday.

The 15-strong group is chaired by Dr Keith McCullagh, chief executive of British Biotech, the sector's leading company, and includes representatives from the Bank of England, the Confederation of British Industry and leading institutional investors. According to sources close to the confidential meeting, the group will present a report to Geoffrey Robinson, the Paymaster- General, in January, proposing tax breaks for biotechnology and IT companies.

Under the proposals, R&D spending would trigger a cash injection from the Inland Revenue into the profit and loss account as a tax credit. While details are still being thrashed out, companies would get a proportion of what they invest in research paid back as tax.

The scheme would allow loss-making companies to bring forward the tax credits that they build up, but cannot utilise under the current rules until they make profits.

One source close to the talks and from the biotech sector said: "The timing of when we get money can be the difference between success and failure. The question is surviving until the research pays off. It is of little use to building up huge tax losses which we can only enjoy if we make it to profit."

Ian Smith, pharmaceuticals analyst at Lehman Brothers pointed out the advantages to the Government: "Companies could do more research, employ more people and make discoveries more quickly. The government gets taxes faster and creates an industry that can compete better world-wide."

However, the scheme would have a substantial start-up cost. Last year the UK biotech industry spent almost pounds 300m on R&D. The difficulty will be persuading the Government to back a potentially costly scheme which could be criticised as a subsidy to an industry often viewed suspiciously by the public.