Innovation in the UK Retail Sector - Nesta

Innovation in the UK Retail Sector
8.16 In part, it arises from the scheme’s use of a technology-focused definition of R&D
employed which is linked to the OECD’s Frascati manual. This in turn is linked to the
need to conform to related accounting definitions of R&D expenditure 19 . As a result, it is
unlikely that the definition will be diluted, but one consequence is that it has been more
difficult to determine whether certain types of innovation (for example hidden, nontechnological,
process-based or even some innovation involving software applications)
with less tangible inputs and measureable outputs qualify for relief.
8.17 R&D tax incentives are used widely internationally to encourage innovation, with
schemes being either volume-based or incremental 20 . The US retail sector is often cited as
being more innovative and productive than that in the UK. In the US, federal and state
tax credits schemes are certainly much more readily utilised by the retail sector, although
the same bias to certain sectors exists within both jurisdictions. Nevertheless, from 1998-
2001, $186mn was directly claimed in R&E 21 tax credits by US retailers, representing 3%
of claim volume and 7% of returns (National Science Foundation, 2005). Indeed, such
has been the growth of interest in federal R&E credits, mediated by third party tax
advisers, that the IRS has designated research and experimentation credit claims as a ‘tier
one’ compliance issue. Using a somewhat different definition of R&D/R&E in the US
potentially allows the scheme to recognise many of the particular kinds of innovation
practiced by retail firms, including own brand development and service-oriented ICT
systems in areas ranging from merchandising, price optimization, point of sale, sales
audit, labour scheduling, transportation management, space utilization and warehouse
management, to e-commerce 22 . For example, the wages paid to a retailer’s textile
development specialists, designers, process engineers, and others involved in new product
and process development may qualify for the research credit.
8.18 The scheme as operated in the UK has also been viewed by commentators as inconsistent
and overcomplicated in relation to qualifying costs, subcontracting and the applications
and inspection process itself 23 . For example, the nature of retail innovation amongst
larger firms means that complex subcontracting rules fail fully to accommodate the
notion that retailers can act as ‘innovation hubs’ for the value chain – and indeed for the
industry as a whole. They do this by stimulating suppliers into developing new and
innovative products and services on their behalf which can be brought to market, creating
attractive spillover effects. Or by accommodating open innovation, which would also
benefit the sector as a whole. Further, whilst HMRC make clear that “the Government wants
companies undertaking R&D to get the reliefs to which they are entitled in a simple way” 24 this does
not appear to have been the experience anecdotally from retailers to date. For example, in
terms of administration, few even large firms will have the kinds of project accounting
systems which could make these kinds of applications more straightforward. Whilst
Business Link offers a useful online eligibility assessment 25 , smaller firms find that they
19 R&D for tax purposes in the UK takes place when a project seeks to achieve an ‘advance in underlying science or technology’. Those activities
which directly contribute to this advance through the ‘resolution of scientific or technological uncertainty’ are defined as R&D. Certain qualifying
indirect activities also count. (HMRC, 2004).
20 A useful summary of international R&D tax incentives can be found at:
http://public.deloitte.com/media/0424/Global%20Incentive%20Matrix.pdf
21 R&E: Research and Experimentation
22 See the discussion in Deloitte, (2007), Research and Development Tax Incentives for the Retail and Textile Industries, Deloitte Development LLC,
http://www.deloitte.com/dtt/cda/doc/content/US_Tax_r%26dretail_101607.pdf
23 See, for example, Arnott, S., (2006), ‘Industry calls for R&D tax credit shake-up’, Computing, 15th March,
http://www.computing.co.uk/computing/news/2151992/industry-calls-tax-credits
24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD85100.htm
25
http://www.businesslink.gov.uk/bdotg/action/logicToolStart?r.l1=1073858808&r.l3=1077465866&type=BLTTOOL&itemId=1077460433&r.l2
=1073859200&r.s=sc
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