Innovation in the UK Retail Sector - Nesta
Innovation in the UK Retail Sector - Nesta
Innovation in the UK Retail Sector - Nesta
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.16 In part, it arises from <strong>the</strong> scheme’s use of a technology-focused def<strong>in</strong>ition of R&D<br />
employed which is l<strong>in</strong>ked to <strong>the</strong> OECD’s Frascati manual. This <strong>in</strong> turn is l<strong>in</strong>ked to <strong>the</strong><br />
need to conform to related account<strong>in</strong>g def<strong>in</strong>itions of R&D expenditure 19 . As a result, it is<br />
unlikely that <strong>the</strong> def<strong>in</strong>ition will be diluted, but one consequence is that it has been more<br />
difficult to determ<strong>in</strong>e whe<strong>the</strong>r certa<strong>in</strong> types of <strong>in</strong>novation (for example hidden, nontechnological,<br />
process-based or even some <strong>in</strong>novation <strong>in</strong>volv<strong>in</strong>g software applications)<br />
with less tangible <strong>in</strong>puts and measureable outputs qualify for relief.<br />
8.17 R&D tax <strong>in</strong>centives are used widely <strong>in</strong>ternationally to encourage <strong>in</strong>novation, with<br />
schemes be<strong>in</strong>g ei<strong>the</strong>r volume-based or <strong>in</strong>cremental 20 . The US retail sector is often cited as<br />
be<strong>in</strong>g more <strong>in</strong>novative and productive than that <strong>in</strong> <strong>the</strong> <strong>UK</strong>. In <strong>the</strong> US, federal and state<br />
tax credits schemes are certa<strong>in</strong>ly much more readily utilised by <strong>the</strong> retail sector, although<br />
<strong>the</strong> same bias to certa<strong>in</strong> sectors exists with<strong>in</strong> both jurisdictions. Never<strong>the</strong>less, from 1998-<br />
2001, $186mn was directly claimed <strong>in</strong> R&E 21 tax credits by US retailers, represent<strong>in</strong>g 3%<br />
of claim volume and 7% of returns (National Science Foundation, 2005). Indeed, such<br />
has been <strong>the</strong> growth of <strong>in</strong>terest <strong>in</strong> federal R&E credits, mediated by third party tax<br />
advisers, that <strong>the</strong> IRS has designated research and experimentation credit claims as a ‘tier<br />
one’ compliance issue. Us<strong>in</strong>g a somewhat different def<strong>in</strong>ition of R&D/R&E <strong>in</strong> <strong>the</strong> US<br />
potentially allows <strong>the</strong> scheme to recognise many of <strong>the</strong> particular k<strong>in</strong>ds of <strong>in</strong>novation<br />
practiced by retail firms, <strong>in</strong>clud<strong>in</strong>g own brand development and service-oriented ICT<br />
systems <strong>in</strong> areas rang<strong>in</strong>g from merchandis<strong>in</strong>g, price optimization, po<strong>in</strong>t of sale, sales<br />
audit, labour schedul<strong>in</strong>g, transportation management, space utilization and warehouse<br />
management, to e-commerce 22 . For example, <strong>the</strong> wages paid to a retailer’s textile<br />
development specialists, designers, process eng<strong>in</strong>eers, and o<strong>the</strong>rs <strong>in</strong>volved <strong>in</strong> new product<br />
and process development may qualify for <strong>the</strong> research credit.<br />
8.18 The scheme as operated <strong>in</strong> <strong>the</strong> <strong>UK</strong> has also been viewed by commentators as <strong>in</strong>consistent<br />
and overcomplicated <strong>in</strong> relation to qualify<strong>in</strong>g costs, subcontract<strong>in</strong>g and <strong>the</strong> applications<br />
and <strong>in</strong>spection process itself 23 . For example, <strong>the</strong> nature of retail <strong>in</strong>novation amongst<br />
larger firms means that complex subcontract<strong>in</strong>g rules fail fully to accommodate <strong>the</strong><br />
notion that retailers can act as ‘<strong>in</strong>novation hubs’ for <strong>the</strong> value cha<strong>in</strong> – and <strong>in</strong>deed for <strong>the</strong><br />
<strong>in</strong>dustry as a whole. They do this by stimulat<strong>in</strong>g suppliers <strong>in</strong>to develop<strong>in</strong>g new and<br />
<strong>in</strong>novative products and services on <strong>the</strong>ir behalf which can be brought to market, creat<strong>in</strong>g<br />
attractive spillover effects. Or by accommodat<strong>in</strong>g open <strong>in</strong>novation, which would also<br />
benefit <strong>the</strong> sector as a whole. Fur<strong>the</strong>r, whilst HMRC make clear that “<strong>the</strong> Government wants<br />
companies undertak<strong>in</strong>g R&D to get <strong>the</strong> reliefs to which <strong>the</strong>y are entitled <strong>in</strong> a simple way” 24 this does<br />
not appear to have been <strong>the</strong> experience anecdotally from retailers to date. For example, <strong>in</strong><br />
terms of adm<strong>in</strong>istration, few even large firms will have <strong>the</strong> k<strong>in</strong>ds of project account<strong>in</strong>g<br />
systems which could make <strong>the</strong>se k<strong>in</strong>ds of applications more straightforward. Whilst<br />
Bus<strong>in</strong>ess L<strong>in</strong>k offers a useful onl<strong>in</strong>e eligibility assessment 25 , smaller firms f<strong>in</strong>d that <strong>the</strong>y<br />
19 R&D for tax purposes <strong>in</strong> <strong>the</strong> <strong>UK</strong> takes place when a project seeks to achieve an ‘advance <strong>in</strong> underly<strong>in</strong>g science or technology’. Those activities<br />
which directly contribute to this advance through <strong>the</strong> ‘resolution of scientific or technological uncerta<strong>in</strong>ty’ are def<strong>in</strong>ed as R&D. Certa<strong>in</strong> qualify<strong>in</strong>g<br />
<strong>in</strong>direct activities also count. (HMRC, 2004).<br />
20 A useful summary of <strong>in</strong>ternational R&D tax <strong>in</strong>centives can be found at:<br />
http://public.deloitte.com/media/0424/Global%20Incentive%20Matrix.pdf<br />
21 R&E: Research and Experimentation<br />
22 See <strong>the</strong> discussion <strong>in</strong> Deloitte, (2007), Research and Development Tax Incentives for <strong>the</strong> <strong>Retail</strong> and Textile Industries, Deloitte Development LLC,<br />
http://www.deloitte.com/dtt/cda/doc/content/US_Tax_r%26dretail_101607.pdf<br />
23 See, for example, Arnott, S., (2006), ‘Industry calls for R&D tax credit shake-up’, Comput<strong>in</strong>g, 15th March,<br />
http://www.comput<strong>in</strong>g.co.uk/comput<strong>in</strong>g/news/2151992/<strong>in</strong>dustry-calls-tax-credits<br />
24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD85100.htm<br />
25<br />
http://www.bus<strong>in</strong>essl<strong>in</strong>k.gov.uk/bdotg/action/logicToolStart?r.l1=1073858808&r.l3=1077465866&type=BLTTOOL&itemId=1077460433&r.l2<br />
=1073859200&r.s=sc<br />
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