Research and Development: Brown aims to boost small firms with £40m tax relief

Small firms and biotech and pharmaceutical companies are the winners from the extension of tax relief on research and development spending, worth at least £40m a year.

A day after a global study showed the UK slipping down the league of international cost competitiveness, Gordon Brown outlined a number of initiatives aimed at boosting innovation.

He intends to extend the number of companies that can make claims for R& D tax credits under an existing scheme. The additional support, which typically provides 150 per cent tax deduction on R&D spending, will go to companies that employ between 250 and 500 people. Under the measure, small and medium-sized businesses will collect £40m of benefits a year.

The EEF manufacturers' lobby group welcomed the move. Director General Martin Temple said: "Improving our performance in this area is key to UK manufacturing companies prospering in the future and the extension of the credit should help enhance their innovation potential."

However, tax experts criticised the absence of a date when the change will come in and pointed out it would need the approval of the European Union as the scheme is classified as state aid.

The other big change is to extend the categories of qualifying R&D expenditure to include payments made to clinical trial volunteers, benefiting biotech and pharmaceutical companies.

Large companies will not be pleased with the new rules, which reduce the time limit for filing claims for R&D tax deductions from 6 years to 2 years. The changes require all businesses to make claims by the first anniversary of the filing date for the tax return. That is designed to remove the confusion of having different time limits for filing R&D claims. David O'Keeffe, a tax partner at KPMG, said: "This change should not prove too onerous but companies which have yet to claim for earlier periods will need to take action soon if relief is not to be lost."

As part of the Government's five-year science strategy, Mr Brown announced Britain would, in future, have a single budget for the medical research council and NHS research, worth at least £1bn a year. The UK Trade and Investment body will have a bigger role in marketing the UK's science base to business, implementing a new £9m international R&D strategy to attract investment to the UK and promote British firms abroad.

In addition to the other measures benefiting small firms, the Chancellor increased first-year capital allowances for small businesses spending on factories and machinery from 40 per cent to 50 per cent for one year.

Some experts deplored the changes that reduce the access to capital for many growing businesses. By reducing the size of company that can attract the enterprise investment scheme and venture capital trust investment, the Chancellor sought to refocus these reliefs at the small end of the company spectrum.

Russell Gardner of Ernst & Young said: "Whether this has the desired effect will become clear over time but it will come as a disappointment to those growing businesses that have today found themselves too big to need help in attracting investment."

Case Study, Businesswoman: 'I'm not surprised I have been overlooked'

By Geneviève Roberts

Moni Omotoso is a small business owner selling maternity clothes and baby changing bags on internet business Forty-Weeks.co.uk. Started business in 2000 selling maternity clothes wholesale, but has set up internet business this year with £35,000 from small business loan from Natwest. .

Lives Single mother, living in Dulwich with son, Tyler, age five.

Age 38

Income Last year, £10,000. With £25,000 of stock already, estimates business to make up to £100,000 over the next 12 months.

Receives £64 per month in child benefit. Tyler's father currently pays £0 in maintenance towards his upbringing, but she hopes this will change. She receives £480 housing benefit per month.

Outgoings Ms Omotoso rents her flat in East Dulwich for £1,300 per month (minus £480 housing benefit), so spends £820 in total on housing. She is exempt from paying council tax. Tyler is at school full-time, but Ms Omotoso spends £21 per week on after-school club. She spends £5 - £7 per week on travel.

Politics Voted Labour at last election and will vote for them again.

Hopes for Budget "Another £5 per week on child benefit would be good to help towards childcare."

Effect of Budget Difficult to predict as Ms Omotoso estimates that her income will grow to £100,000 this year. As it is only £10,000 this year there will obviously be a big gain, but little of this has to do with Budget measures. In fact, she would be £52,000 better off in real terms if she achieves her growth aim - she would lose £30,000 in income tax and £4,341 in child tax credits.

Reaction "I'm not surprised that I have been overlooked by the Budget. There should ongoing support for people consolidating their businesses, not just financially, but in terms of development"

Case Study, High earner: 'It's strange Gordon Brown has cut money for enterprise'

By Geneviève Roberts

Hannah Sutter is the owner of the GoLower brand, selling health food snacks. Formerly a partner at DLA law firm, she used her savings to set up the brand, selling low GI snacks.

Lives She lives with her husband, Andrew Brimelow, a GP, 47, in Edinburgh. They have two children Maria, 13 and Joel, 10. They have a second home on the Isle of Tiree.

Age 48

Income Joint annual earnings of £120,000. Ms Sutter: £50,000 and Dr Brimelow: £70,000. They also get child benefit of £155 a month for two children.

Outgoings They own two houses, one in Edinburgh paying a £500 per month mortgage and one on the Isle of Tiree off the west coast of Scotland, paying an £800 per month mortgage. But this mortgage is offset against the £8,000 per year tax deductable income from letting the property as a holiday home. They spend £1,000 per year on fuel bills for the house in Tiree, and £1,750 for their home in Edinburgh.They spend £1,500 per month on school fees. Ms Sutter works in London two days a week, which costs her business £2,000 per month.

Politics Voted Liberal last time.

Hopes for the Budget "I would really like to see health food be exempt from VAT," Ms Sutter said. "I would like the tax relief for those investing in small businesses through the Enterprise Investment Scheme to continue."

Effect of the Budget The family would be about £382 better off. They have gained £450 through changes in Income Tax but will lose £106 through alternations to National Insurance.

Reaction "I do not think that there is enough in this Budget that helps working mothers with childcare, particularly when we have already paid for nannies and nurseries with our own, taxed, income."

* Treasury Budget site

* Chancellor's Statement in full