Business groups warmly welcomed changes to the research and development tax credit system, which they said will help boost investment and create jobs.
Chancellor George Osborne said he had listened to lobbying from groups including the Society of Motor Manufacturers and Traders (SMMT) and Engineering Employers Federation (EEF) and would make changes in 2013 to increase the generosity of the system.
The SMMT said the revision will help motor companies, generate more investment in research and development in the UK and safeguard and create jobs.
Chief executive Paul Everitt said: "Reform of the R&D tax credit system propels the UK into a new league of global competitiveness sending a strong signal to international investors.
"The UK is already a centre for innovation with advanced engineering and low carbon expertise attracting major corporations to invest in the UK. This reform will enhance the UK's investment appeal, create high value jobs and drive economic growth."
EEF chief economist Lee Hopley said: "Making R&D tax credits payable above the line is a smart reform without a big price tag.
"It will send a powerful signal that Government intends to make the UK the number one choice for R&D investment and is another step on the road to making the UK the most competitive tax system in the G20.
"This reform will strengthen the link between the credit and the R&D function and make it more valuable to R&D decision makers. It will have a positive impact on investment decisions across a range of companies and support rebalancing growth towards high value investment in innovation and jobs."
A joint submission to the Government by the two groups earlier this month said that investment decisions by UK and foreign firms would be boosted if the current arrangement of tax credits was changed to a cash benefit or redeemable credit when R&D costs arose.
The additional cost to the Government would be around £205 million a year, but 7,700 jobs would be created on conservative estimates, rising to 31,300 under more optimistic assumptions on the impact of the change, said the report.
The business groups warned that some firms were looking more favourably to countries such as France, where R&D incentives were "dramatically" more attractive.
United States-owned firms would particularly benefit from the change because at the moment they have to pay more tax in the US if they receive credits in this country, said the SMMT and EEF.
