McConnell U-turn on business tax pledge

A BID to slash taxes for businesses north of the Border has been effectively shelved by ministers less than 12 months after it was announced, Scotland on Sunday can reveal.

The flagship plan, which would have reduced business rates for firms which invest in research and development, has been "reined in", according to senior sources, after it proved too difficult to implement.

First Minister Jack McConnell put forward the proposals last year, saying they would "make Scotland the most attractive place in the UK in which to invest in research and development".

Ministers promised to consider introducing the move along with a wider bid to reduce business rates for all firms to the levels currently set in England.

However, several senior business leaders have been privately told by officials that it will not be forthcoming. Instead, ministers are understood to be looking at new ways to provide help.

The move was seized on by opposition parties last night. Murdo Fraser, enterprise spokesman for the Scottish Tories, said: "They have been left with egg on their faces because it is very difficult to implement."

The plan was put forward by McConnell as a way of tackling Scotland's historically low levels of research and development, which is seen as crucial to keeping Scotland's economy competitive.

However, it is understood that civil servants warned almost immediately after McConnell's pledge that the plan would fall foul of European Union trade rules. And business groups are said to have been cool on the plan from the start, fearing that it would create a huge amount of bureaucracy.

A draft document containing the plan was supposed to have been published last December, but has been postponed on at least two occasions as officials attempt to come up with policies which will work.

Finance minister Tom McCabe also claimed last year that the plans would be finalised by this summer, a deadline which has now also passed.

One senior Executive source confirmed that ministers had run into difficulties in finding a policy which would actually improve the lot of businesses.

"It has not been easy to progress because we have a very limited palette of options," the source said. "The cut in business rates for R&D was always an intent rather than a policy. There is now an ongoing attempt to find the best way forward. We need to find an effective way of doing this."

One business insider added: "It has been reined back. It was a good wheeze, but it seems they then showed it to their civil servants who pointed out some of the problems. They are now looking at alternative things to do. The problem is, how do you define research and development? If a finance company comes along, having developed a new service, could they apply?"

Business groups last night called for ministers to act on their year-old pledge to help boost research and development without delay.

A spokesman for the Confederation of British Industry said: "The key points are that any new scheme is implemented sooner rather than later, is simple to access, and generous if it is to make a substantial impact. Such a move has the potential to stimulate private sector investment."

A spokesman for the Federation of Small Businesses said: "It does appear that the Executive have run into difficulties in terms of how to implement the scheme. For small businesses, any scheme - whether it be for research and development, or for tax credits or whatever - there is always an issue because the bureaucracy is too complex."

Figures show investment in research and development in Scottish firms lags at £319 a year per employee, compared with £702 per employee across the UK. Such research is crucial if businesses are to innovate and expand, thereby keeping up with their international competitors.

The announcement on cutting business rates for such firms was paraded by McConnell last September to Parliament, when he revealed he would be bringing business rates in line with England.

He then told MSPs: "Oh, there is more. Because we want to provide further incentives that will give Scotland a competitive advantage, we will consider carefully a specific reduction in business rates for research and development intensive companies. In doing so, we will make Scotland the most attractive place in the UK in which to invest in research and development."

Fraser, for the Tories, said: "The Executive have been made to look foolish on this. They made a commitment, but when it comes to working out the detail they realise they can't do it. Then they hope that it will quietly go away.

"This was announced as a flagship plan last year for business, but the Executive clearly didn't do their homework.

Businesses who do invest in research and development and who were hoping for rate reductions as a result will be left disappointed."