IT budgets for small and medium-sized businesses are set to increase by more than 12 per cent this year, double the rate of similar companies in France and Germany, according to new research.

The report on IT budgets by analysts AMR Research found that UK spending is surpassing that of both France and Germany by seven per cent. Overall IT budgets are expected to rise by 5 per cent for those two countries this year.

The study also revealed that UK spending is focused on improving existing systems rather than investing in new and innovative technology.

"The numbers look really good, but 20 per cent of the money being spent is on compliance, so actually there is not that much free cash floating around for innovation," said AMR analyst Nigel Montgomery.

"This year people are overtly focusing on manufacturing. It is essentially a case of going back to basics in IT," he added.

This shift in spending is in contrast to the focus during 2005, when product innovation and development was paramount.