Innovation in the UK Retail Sector - Nesta

Recommendation 2:
Increase the take-up of R&D tax credits by the retail sector.
Innovation in the UK Retail Sector
Desired outcome: Improved awareness and utilisation of R&D tax credits within the UK retail sector.
Background: R&D tax credits were originally launched in April 2000 to reward innovation by firms,
but favour a ‘manufacturing mindset’. They are less appropriate for some kinds of
innovation, particularly the wider innovation practised by retail firms, and by suppliers
on their behalf. This mindset is out of step with tax incentives in other jurisdictions.
R&D tax credits are a potentially attractive way for stimulating certain types of
innovation in retailing. The nature of larger retail firms as ‘innovation hubs’ increases
the possibility of attractive spillover effects, with retailers acting as a catalyst for
innovation within the value chain amongst suppliers, and with benefits for the sector as
a whole: thereby enhancing UK productivity and competitiveness. Industry groups
have lobbied for the refining of the R&D tax credit system for some time.
Evidence: Exceptionally poor levels of take-up of tax credits by the sector; high rejection rates of
applications which do not conform to relatively restrictive rules; lack of appropriate
training amongst inspectors to recognise legitimate claims from more ‘intangible’
applications nevertheless involving technology. Retail firms in more enlightened
jurisdictions benefit more from such incentive schemes.
Analysis: Increasing awareness and take-up will require:
Conclusion/Next
Steps:
2.1 Identifying and prioritising the kinds of activities undertaken by retailers and
by suppliers on their behalf which might qualify for support under both large
business and SME schemes.
2.2 Improving awareness of the schemes and of these priorities amongst retailers,
particularly retail SMEs outside London and the South-East.
2.3 Improving the speed and transparency of the application process to reduce
uncertainty
2.4 Investigating the extent to which, without diluting the existing mechanisms,
the R&D tax credit scheme might be both deepened and broadened to benefit
service innovation
Risks of inaction: retailers will fail to fully exploit an existing financial mechanism for
the stimulation of innovation.
BERR/HMRC to work with retailers and key third party suppliers to clarify the kinds
of activities undertaken by and for retailers which would qualify for tax credits and to
examine ways in which the application and inspection process for tax relief on such
activities might be further streamlined.
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