Innovation in the UK Retail Sector - Nesta

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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 Page 62
Innovation in the UK Retail Sector often require specialist tax advice in order to navigate the application process and this can be burdensome and disproportionately expensive: “…many companies remain unaware of the potential relief available or are sceptical of their ability to make a valid claim” (Deloitte, 2007). 8.19 Efforts have recently been made to increase awareness of tax credits amongst smaller UK firms and improve the regional administration of applications. New specialist HMRC units have been established to counter the dominance of applications from London and the South East, as well as to create centres of expertise. Towards the end of 2006, tax inspectors undertook training to improve their understanding of software-related applications. However, it is too early to judge the effectiveness of these measures in stimulating uptake of incentives. 8.20 Whilst there might not be scope for dilution of R&D tax credits, there might be potential for a degree of extension and simplification. For example, the i2010 working group recommended that R&D tax credits might be extended to include capital expenditure (allowed in other jurisdictions, including Canada) which would allow those companies capitalising manpower costs to be eligible to apply (Information Age Partnership, 2007). The working group also suggested that the scheme could be widened to allow the cost of overhead activities indirectly supporting R&D work to be included. Page 63
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Report for NESTA December 2007 Inno
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Contents Innovation in the UK Retai
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Innovation in the UK Retail Sector
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Innovation in the UK Retail Sector
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2. The nature and contribution of r
Page 11 and 12: Innovation in the UK Retail Sector
Page 23 and 24: v. Retailers’ reverse innovation
Page 41 and 42: Vignette 5.3: Currys customer recyc
Page 43 and 44: 6. What are the barriers to retail
Page 47 and 48: 7. What are the measures of retail
Page 49 and 50: . Types of Measures Innovation in t
Page 61: Innovation in the UK Retail Sector
Page 65 and 66: . Promoting innovation in sustainab
Page 69 and 70: Conclusion/Next Steps: Innovation i
Page 73 and 74: Recommendation 4: Innovation in the
Page 77 and 78: Appendix 1 Research Methodology 350
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