Tax inspectors are to be given a crash course in computer science to encourage them to accept more applications from companies claiming research and development tax credits for software innovation, the chancellor will promise in next week’s pre-Budget report.

Intellect, the IT trade association, which has lobbied hard for the change, expected the measure to be outlined in Treasury documents published with Gordon Brown’s speech to the Commons on Monday.

The chancellor introduced R&D tax credits in 2000 to boost innovation so small companies could offset R&D costs. The scheme was extended to large companies in 2002, but while the credits have cost the Treasury about £1.3bn, take-up has been disappointing.

The CBI and EEF employers’ bodies estimate the scheme has so far only cut the R&D costs of business by 4 per cent, compared with a target level of 10 per cent.

The chief complaint has been inconsistent rulings on which applications are approved. Businesses say claims with applications that would be passed by some tax inspectors were turned down by others.

Software development and engineering design projects are especially dogged by such inconsistencies because inspectors, lacking expertise, cannot identify when innovative changes are being made and are unsure when applications for tax credits are valid.

Tom Wills-Sandford, Intellect’s director of public affairs, welcomed the proposal to train inspectors from Revenue & Customs and said it would make the UK a more attractive place to invest.

Many valid tax credit claims for software development had been turned down because tax inspectors did not understand IT, said Mr Wills-Sandford.

“I have heard stories of Revenue officials saying this cannot be R&D because you are using an existing computer language. That is like saying you cannot build an interesting house if you use bricks.”

Diarmuid MacDougall, director of tax and legal services at PwC, the professional services firm, said the problem had worsened recently with more software companies having their claims for R&D tax credits challenged.

“Where once we were told that most claims [by software companies] were being passed without inquiry, we now find that almost every claim will have inquiries on it,” he said.

Figures published by the Office for National Statistics last week showed that business spent £13.5bn on R&D, a fall of 1 per cent from £13.7bn the previous year.

Mr Brown is spending £400m a year subsidising R&D in big companies but business R&D spending fell as a share of national income to 1.1 per cent in 2004 after being stuck at 1.2 per cent for the previous seven years.

The UK lags behind its closest competitors in R&D spending. In 2002, total R&D spending by government and business as a percentage of national income was 1.9 per cent in the UK compared with 2.7 per cent in the US, 2.5 per cent in Germany and 2.2 per cent in France.

Mr Brown has set a target of raising total R&D spending to 2.5 per cent by 2014.

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