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Thousands of small-to-medium-sized businesses are missing out on a total of £125 million each year by not taking advantage of research and development tax credits, Grant Thornton has warned.
Since 2001-02 such credits have provided an estimated £1.76 billion in funding towards R&D undertaken by companies in the UK, through either tax breaks or cash claims.
But R&D as a percentage of the country's GDP has remained relatively stagnant over the past ten years, falling from 1.78% in 1997 to sit at 1.75% in 2005.
Sarika Patel, head of technology at Grant Thornton, is adamant current research and development levels could be increased if businesses were more aware of what constitutes R&D, and if the Government were to expand its definition of what business activity is eligible for tax credits.
Ms Patel said it was pleasing that HMRC has created regional units to help firms exploit their own research, but she added that UK R&D is being hamstrung by restrictive categorisation of what the Government believes constitutes innovation.
'The R&D system needs to better reflect the prominence of the service sector in the UK,' she remarked.
'It is possible that non-technological sectors, such as the financial market, could produce serious benefits for the UK if they were encouraged, and saw the associated benefits, from undertaking R&D - but until the definitions are expanded, innovation in these sectors will remain untapped.'
Ms Patel concluding by expressing the belief that the UK's system is being constrained to some extent by the EU: 'Although enhanced incentives for SMEs to innovate are on the table, they are not yet available. We strongly encourage the Government to chase Brussels for approval'.
