R&D can be defined as any project to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology. Advances include new or improved products, processes and services. In the UK, the accounting definition of R&D is contained in the Statement of Accounting Practice (SSAP) 13 and for international companies, International Accounting Standard (IAS 38) both of which are based on the OECD 'Frascati' manual. This definition is modified for tax purposes by the guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry.

Although the UK has a strong science base, UK businesses as a whole invest less in R&D than their main international competitors. Business R&D has increased in real terms in recent years, but has not risen as a share of UK national wealth as measured by GDP. The Office of National Statistics publish data showing the trends of expenditure on R&D in the UK and the latest figures show R&D expenditure remaining at the same level of 1.2 per cent of GDP since 1997.

The Government is determined to close the UK's productivity gap with comparable international economies and is seeking to boost UK R&D investment to 2.5% of GDP by 2014.

An increase in the levels of business R&D will stimulate business innovation and help raise productivity, particularly in the manufacturing sector, which undertakes the majority of R&D in the UK.

The Government has introduced R&D tax credits, an incentive in the form of tax relief for companies of all sizes to raise their R&D investment levels. Tax credits work by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes.

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