UK Research and Development: Addressing the modern realities of innovation
Totalling nearly 62 billion of expenditure in the UK in 2020, research and development (R&D) is a key driver of economic growth with the potential to address key socioeconomic challenges. R&D spans public and private sectors, with regional development opportunities and benefitting the UK’s global competitiveness in technology, business, and science, and the UK’s support for R&D forms a vital backbone for the viability of innovation and economic progress in a globalized technology value chain.
For the technology sector, R&D support from government is crucial for increasing the UK’s attractiveness and potential to become a technology superpower. Scoring as one of the most innovative countries in Europe and the world, the UK is already familiar with the importance of R&D in economy and society; however, the Government’s policy balance of how best to support R&D domestically has created some concerning questions for the future of innovation in the UK. With a Government pledge to increase public and private R&D funding to 2.4% of gross domestic product (GDP) by 2027, the Government has to make progress in how it delivers R&D support, or there is real danger that the UK’s light as a global pioneer in innovation may start to fade.
One of the primary vehicles for supporting R&D, the UK's R&D tax scheme is a government support initiative aimed at encouraging and incentivizing companies to invest in research and development activities. The scheme is designed to reduce the cost of R&D by allowing eligible companies to claim tax relief on their R&D expenditure, either through participation in a scheme tailored for SMEs and or the Research and Development Expenditure Credit (RDEC) scheme.
In its Autumn Statement 2022, the Government announced changes to the UK’s R&D tax credit schemes, with three major changes announced:
- Reductions in the SME scheme,
- The small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.
- Increases in the R&D Expenditure Credit (RDEC) scheme, and
- The Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.
- Simplification of the RDEC scheme.
- The government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D.
The announced changes present challenges to R&D in the UK, with potentially disproportionately damaging effects on to the R&D intensive sectors, further compounded by the challenge that the UK is currently behind many of its OECD peers on government support for R&D.
To remedy this, the Government has stated that public spending on R&D will increase to £20 billion a year by 2024-25, a cash increase of around a third compared to 2021-22. Still, the UK is behind many of its OECD peers on proportional spend, and reductions in tax credit scheme generosity will counteract the overall effectiveness of the Government’s strategy to support R&D. The race for R&D competitiveness is time sensitive, as competing jurisdictions are continuing to push forward new and inventive support for R&D. If R&D support is not modernised and better implemented, the UK is at major risk of being outmanoeuvred and losing its competitive edge in science and technology innovation.
To counteract this, the Government should take action to reduce the damage of the Government’s cut to the SME R&D tax credit scheme. In doing so, it will maintain vital support for SME R&D, a key component of the UK’s innovation ecosystem. Further, the Government should ensure that the UK’s R&D incentives support modern innovation. The UK’s leading RDEC scheme should work to support key growth sectors such as software development and to boost business investment by up to 10% through reforms to the Patent Box. Additionally, the UK should reform the UK’s capital incentives to boost investment in new plants, labs and machinery, with the potential to generate an additional £4bn over 10 years and create 12,200 new R&D jobs across the UK.
Implementation of R&D reform in a manner that nurtures the realities of innovation will catapult the UK towards becoming a leader in R&D support for innovation and will attract firms that seek to innovate in stable, transparent, and rewarding jurisdictions. If the UK implements targeted strategy interventions that focus on international competitiveness and stronger domestic support for R&D, the UK will maintain its position as a global leader in innovation.
techUK’s new tech and innovation campaign hopes to address some of these key challenges discussed in this insight and develop thinking on how the UK can thrive internationally through technology and innovation. With over 950 members working across a diverse range of technologies, and with strong networks across public, private and third sectors, techUK is uniquely positioned to convene technology leaders and ensure the innovation ecosystem is fit for purpose in the UK. For more information or to get involved, please visit our Innovation Hub and complete the ‘contact us’ form.
techUK – Supercharging UK Tech and Innovation
The opportunities of innovation are endless. Automation, IoT, AI, Edge, Quantum, Drones and High Performance Computing all have the power to transform the UK. techUK members lead the development of these technologies. Together we are working with Government and other stakeholders to address tech innovation priorities and build an innovation ecosystem that will benefit people, society, economy and the planet - and supercharge the UK as a global leader in tech and innovation.
For more information, or to get in touch, please visit our Innovation Hub and click ‘contact us’.
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Laura Foster
Laura is techUK’s Associate Director for Technology and Innovation.
