Defence is one of the eight sectors within the Industrial Strategy that the UK Government has singled out for investment, saying that they aim to “deliver the defence industrial base we need to protect our national security while unlocking the sector’s significant untapped potential for creating growth spillover benefits through innovation, exports and scale-ups.”
It’s also a sector that’s received a lot of political and media attention, driven by rising threats to UK and international security, which have spurred a commitment to raise defence spending to 2.6% of GDP in 2027 and then to 3% in the next Parliament.
Despite this commitment, the UK Government faces significant threats at a time when finances are tighter than ever. The conflicts in Ukraine and the Middle East, as well as deteriorating relations with China, have created an urgent need for innovation in our security and military capabilities.
But defence innovation comes with a lot of risks and challenges, as achieving some of the necessary advancements calls for significant scientific and technological breakthroughs.
In this article, we look at the UK Government’s key priorities for defence R&D, highlight the biggest opportunities for innovation, and explain how R&D Tax Credits can help to de-risk research and development projects within the defence sector.
The role of private investment in defence R&D
The key to driving defence innovation is private business investment in R&D. Ironically, this comes at a time when the UK Ministry of Defence (MoD) has admitted in the recent Strategy Defence Review that it “struggles to prioritise science and technology spending and exploit innovation for operational advantage.”
According to the review, the UK Government is focused on bridging the gap between the MoD and the private sector, recognising that much of the best innovation now resides outside of traditional defence contractors – coming instead from tech startups, scale-ups, SMEs and other innovators.
UK Defence Innovation, new defence innovation body, has been created to quickly identify and acquire innovative commercial products and services, including dual-use technologies, with a ring-fenced budget of at least £400 million per year. These dual-use technologies have a huge role to play in contributing to advancing the UK’s modern defence capabilities.
The MoD plans to maximise its existing £2.6 billion R&D investment, collaborating more closely with other government departments, as well as research bodies, and actively engaging with the financial services sector to make defence innovators a more attractive proposition for private investment.
What are dual-use technologies?
Dual-use technologies refer to any technology or software that has both a civil and military application. The UK Government’s strategy focuses on developing these dual-use technologies because they can help drive economic growth while boosting our national security.
The Strategy Defence Review prioritises eleven dual-use technology focus areas, including:
- advanced materials
- aerospace
- artificial intelligence (AI)
- advanced connectivity technologies
- batteries
- cyber
- engineering biology
- nuclear
- quantum
- semiconductors
- space
Which sectors are the UK Government prioritising for defence R&D investment?
The UK Government identified five “frontier industries” within defence, meaning that there are real opportunities for companies undertaking R&D in these areas, including drones and autonomous systems, maritime capabilities, combat air, directed energy weapons, and complex weapons. Below, we explore the priorities for innovation within each industry.
Drones and autonomous systems
The conflict in Ukraine revealed to the world the future of warfare with the widespread use of drones and other autonomous (i.e., uncrewed) systems.
Last year, the MoD published its own Defence Drone Strategy, which (although published under the previous government) highlighted key areas for R&D. Drones offer a low-cost solution compared to more expensive traditional capabilities in attack and surveillance, and they also provide solutions to help with heavy lifting and naval mine clearance.
The drive for innovation isn’t just about enhancing drone technology (although battlefield advancements are a core focus)—there is also a need to improve our ability to manufacture drones and integrate the technology with command-and-control systems across land, sea, and air.
The MoD is also exploring the development of uncrewed and autonomous vessels for maritime use. However, significant modifications to existing equipment and systems are required, as are further advancements in autonomy and data analytics.
Maritime capabilities
The guidance on recent UK defence Innovation Focus Areas reveals that some of the most futuristic technology developments might come from boosting the UK’s maritime capabilities. Again, the UK Government is looking to enhance the technology behind both modifying and manufacturing navy vessels. The guidance identifies the following key areas for potential innovation:
- integrating smart sensors into materials for environmental and structural monitoring
- new methods for embedding wiring and connectors during construction
- introducing morphing materials for rapidly deploying structures and equipment in marine settings
- advanced functionalities for naval vessels, including self-healing, anti-fouling, self-assembling, and self-dismantling.
Combat air
The Future Combat Air System (FCAS) joint international programme is seeking to develop and deliver new state-of-the-art fighter aircraft in partnership with Japan and Italy. For the programme to succeed, there will need to be innovation across a range of technologies, including AI, data, applications, operating systems, visualisation, and complex electronic hardware.
It’s closely linked to the Global Combat Air Programme, which aims to deliver improvements in our combat air capabilities, along with boosting our economy with export sales. The programme plans to achieve this by bringing large companies, SMEs and academia into the UK’s supply chain.
Directed energy weapons
Directed energy weapons, which use advanced laser and radio frequency energy, aren’t yet used in the field by the UK armed forces (although, promising trials have been conducted). The UK Government is looking to make “science fiction a reality”, but the existing technology needs to be developed, which requires advancements to achieve reduction in size, mass and volume of these energy weapons while also achieving performance enhancements.
Complex weapons
“Complex weapons” is an umbrella term for weapons that can carry out “demanding tasks in challenging environments”, which might include portable, surface attack, long-range, or air-to-air weapons.
The UK Government is seeking technological advancements to increase their speed and range. This will require breakthroughs in several areas. For instance, new, advanced materials will need to be developed to handle extreme heat and erosion for faster, longer-range weapons, while also preventing heat from damaging other parts.
There’s also a need for better manoeuvrability, which requires the development of actuators that can withstand extremely high temperatures, as they must be positioned close to the propulsion system.
How can the defence supply chain benefit from R&D tax relief?
R&D tax relief is available for all industries, including defence, that are working to develop breakthroughs in a field of science or technology. So, if it’s uncertain if something is technologically possible and your company undertakes a project to try to overcome this uncertainty, it’s likely that your work will qualify for relief.
If you qualify, you can claim R&D tax relief on costs such as:
- Staff costs (e.g., salaries, pension contributions, etc., of engineers who have worked on developing a new smart sensor).
- Software (e.g., software systems developed for integrating drone technology with command-and-control systems).
- Data licence and cloud computing costs (e.g., licences for large datasets used to train AI models for autonomous systems).
- UK-based contractor payments (e.g., payments to a UK-based supplier that specialises in manufacturing prototypes using high-temperature materials).
- Consumables (e.g., energy consumed during experiments while trying to increase the speed and range of complex weapons).
- Prototypes (e.g., materials used for making a prototype of a new drone – as long as that drone is for testing only and isn’t a working prototype that’s going to be sold).
- Some indirect activities (e.g., administration or maintenance costs, or essential security costs related to protecting the development of sensitive new combat air technologies).
Find out more: What qualifies as R&D expenditure for claiming tax relief?
How R&D Tax Credits can support defence innovation
Defence innovation is full of uncertainty. The push for defence innovation isn’t just about improving equipment, it’s about developing technology that’s so state-of-the-art that it wouldn’t look too out of place in a science fiction film. Significant investment and resources are needed for success, but due to the complexity and groundbreaking nature of military R&D projects, there’s also a realistic chance of failure.
R&D relief helps de-risk innovation. Companies can reduce their taxable profits, or claim a credit for what they’ve spent, on eligible activities through either the merged scheme R&D expenditure credit or enhanced R&D intensive support schemes.
Projects qualify if they’ve attempted to make an advance in a field of science or technology by resolving uncertainty, through either inventing something new, improving something that already exists or discovering something that adds to our overall knowledge. It’s not only successes that qualify. Failures during R&D projects can be just as important when it comes to improving our overall scientific or technological knowledge, if it’s possible to demonstrate what has been learned and what the implications are.
R&D Tax Credits offer substantial financial relief, helping to improve cash flow with funds that can be used for business expansion, staff training, or even further R&D investment. With the current drive to improve our defensive capabilities, there are significant opportunities for innovative companies to develop breakthroughs and take advantage of the government incentives available.
How Leyton can help
Is your company working in defence innovation?
Our R&D relief experts have years of experience helping businesses identify qualifying expenditure for claiming R&D Tax Credits. This can pay dividends, as most companies generally underestimate how much they can claim.
Get in touch to find out more.
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