The Department for Business, Energy and Industrial Strategy (BEIS) announces its most ambitious funding

The Covid pandemic – and the extraordinary success of developing, testing and delivering multiple highly-effective vaccines in months – has underlined the impact of research and innovation. The Government has not only recommitted to the target of 2.4% of national income to be invested in research and development by 2027 – up from 1.7% in 2017 – but to doubling its science and innovation spending to £22 billion by 2024-2025:

Overall, the plans will see more than £5bn of additional funding allocated in the 2024-2025 financial year, compared with the 2021-2022 financial year. This would put the UK on track to deliver on a commitment to ensure that R&D investment reaches 2.4% of GDP by 2027.

Innovation is central to the largest challenges of the present world – from climate change to global pandemics – and crucial to the UK building back better. The Strategy sets out the government’s vision to make the UK a global hub for innovation by 2035 through several key action pillars, the first and foremost of which focuses on fuelling businesses who want to innovate by increase annual public investment on R&D.

It has been argued that the major cause of slowing growth and productivity over recent decades is the slowing rate of innovation. One key marker of this in the UK is the declining rate of growth in R&D spending – both public and private. R&D investment in the UK declined steadily between 1990 and 2004, from 1.7% to 1.5% of GDP, then gradually returned to be 1.7% in 2018. This has been constantly below the 2.2% OECD average over that period.

Because business investment in R&D has fallen relative to our international peers, there are low rates of technology adoption by companies that lead to underutilised knowledge. We are at risk of a ‘brain drain’, the UK being a net exporter of talent and our workforce has skills gaps in certain key areas which are at risk of widening in the coming years. Data, research and IP must be safeguarded to maintain competitiveness.

The Innovation Strategy comes at the most critical moment for the United Kingdom in modern time. Post-Brexit Britain has experienced the largest economic disruption since the Second World War, we face rapidly increasing competition in the global innovation race, and we sit on the cusp of transformative industrial change.

Flagship tax incentives such as R&D Tax Credits are an important part of the UK government’s support for innovative business, incentivising businesses to invest in R&D by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs. The Chancellor announced a review of R&D tax reliefs covering all aspects of the two schemes at Budget 2021: the R&D Expenditure Credit, and R&D Tax Relief for SMEs. The review aims to ensure that the reliefs are up-to-date, internationally competitive, and effectively targeted on activities that drive the best outcomes for the UK economy. A consultation was published alongside the Budget, exploring the nature of private-sector R&D investment in the UK, how it is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate. See our response to the HMRC annual report here.

At Budget 2021, a new tax super-deduction was also announced. It allows companies to claim 130% capital allowances on qualifying plant and machinery investments. The change makes the UK’s capital allowance regime more internationally competitive, lifting the net present value of our plant and machinery allowances from 30^th in the OECD to 1^st. At Leyton we’ve just launched our very own Capital Allowances service, find out more here.

The Intellectual Property (IP) regime remains a core component in giving researchers, inventors and creators the confidence to develop something new. It helps innovators reap the rewards of their investments, promoting investment in research and innovation. IP is vital to the UK economy: in 2016, firms in the UK private sector invested an estimated £134.3 billion in knowledge assets, of which £63.8 billion was protected by IP rights. 39 40 Use of IP has been linked with an increase in firm performance, with ownership of IP rights being strongly associated with improved economic performance at firm level. The UK IP system’s ability to keep pace with technological change is central to its high performance. The Patent Box tax incentive is a further measure that supports the retention of IP in the UK, by allowing businesses to pay a reduced rate of tax on profits arising from exploiting patents and other qualifying products. Its aim is to encourage the commercialisation of inventions by companies in the UK. The Patent Box Scheme is one we have been helping our clients in for a number of years, find out how we could assist your business here.

Innovation is at the heart of government policy at the moment but achieving the Government’s ambitions – in terms of spending and impact – can’t be done by the public sector alone.  To achieve the 2.4% target, even with £22bn in the public science budget, requires the private sector to spend £17.4bn a year more on R&D in 2027 than it did in 2017, according to the National Centre for Universities & Business. It is essential that the favourable public climate supports the tremendous growth required by private spending with fit-for-purpose policies that ensure not only targets are met, but that they achieve the intended outcomes as well.