Investment in innovation by UK technology companies continues to lag international competitors, despite tax incentives to encourage more research and development.
Tax breaks for software R&D were granted to small and medium-sized enterprises in 2001 and extended to corporates last year, allowing them to offset investment against tax.
But the Department of Trade and Industry's annual R&D Scoreboard shows that spending on R&D by the UK's top 700 companies as a percentage of sales remains at last year's figure of 2.2 per cent. This compares with 4.3 per cent for the top 700 international companies, and 5.2 per cent for those in the US.
Trade body Intellect said the tax breaks offered needed to be about 10 per cent and made easier for businesses to collect.
"Our main concern is that for large companies the effective reward they get for investing in R&D is four to five per cent. So if you spend £1m you get between £40,000 and £50,000 back. That's below the noise level," Tom Wills-Sandford, director of campaigns at Intellect, told vnunet.com.
Intellect has been working with the Inland Revenue to improve tax inspectors' understanding of how tax credits can be applied to software R&D, as businesses have found it difficult to obtain them.
"We are moving towards a knowledge economy and need a more highly skilled workforce. It's my nightmare that R&D will move offshore and make the UK a much poorer place," Wills-Sandford said.
The DTI report added that even though R&D investment in the UK's software and IT services sector is on the up it still lags behind the international average of 11 per cent as a percentage of sales.
Science and innovation minister, Lord Sainsbury, said: "R&D helps create the innovative products and services that UK businesses need to compete on the global stage. There are successful UK companies in many sectors investing in R&D at world-class levels, but there needs to be more."
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