THE CHANCELLOR will today unveil an overhaul of the tax breaks designed to encourage research and development.

The R&D tax credits scheme will be updated after a high-powered report found that it was failing to boost small and medium-sized enterprises (SMEs).

Under the plans, new specialist groups of tax inspectors will deal with all R&D tax credit claims. The tax breaks will be extended to include clinical trial volunteers. It will also become simpler for small firms to apply for tax credits.

However, the changes fell short of the proposals outlined in the Cox review of creativity in business. The report by Sir George Cox, chairman of the Design Council, said R&D tax credits should be more generous and made available to more firms.

Sir George, who was charged by Gordon Brown earlier this year with investigating how to use Britain’s creative industries and universities to develop the creativity of SMEs, said: “R&D tax credits need to be viewed by the Treasury as an incentive scheme to be promoted, not an avoidance scheme to be policed.”

The Cox report says the credits available should be increased and that added benefits should be awarded to firms which boost their research and development activities. Sir George also said that more firms should be eligible to receive some of the tax breaks.

The Treasury said it would not increase the thresholds for SME tax credit. “Discussions with business have reinforced the Government’s view that the volume-based structure is most effective.”

But it said that it would continue to consider the evidence presented by the Cox Review, and announce any conclusions during next year’s budget.

David Kester, chief executive of the design council, said: “This is good news as long as they do eventually push all the changes through.”

The changes to the tax credits scheme come days after new figures showed that business spending on civil research and development fell by 4 per cent to £13.5 billion last year, the first decline in R&D spending under the Labour Government.

In his report, Sir George also gives warning that the economies of the Far East are not the only source of competition for British industry. He pointed to the “potentially huge” economies of Russia and Brazil.

He said that although the UK is an “acknowledged world leader” in some creative industries, the rest of British businesses fail to exploit this creativity.

“Too often in the UK, entrepeneurial enterprises aim too low or run out of steam,” he said” Sir George wants to introduce a nationwide programme to help small businesses become more aware of the benefits of creativity, at a cost of £30 million.

He also called for company boards to appoint directors with creative skills.