The UK has a great record of R&D, contributing 25% of the top prescription medicines, and home to many recognized experts in AI and machine learning technology. However, as a whole, the UK invests just 1.7% of GDP on R&D. Leading nations such as South Korea are investing 4.3% and the OECD average is just over 2.3%. It’s been shown that every pound spent on medical research delivers an annual return of 25 pence every year thereafter. Despite the ongoing benefits of R&D, the investment is just not there.
In the recent budget released in March, the UK has pledged to raise this investment to 2.4% by 2027, which still falls short of the leading nations. But how are they planning on reaching this goal? The Chancellor pledges to review the R&D tax relief scheme, hoping to enhance and broaden the horizons. The government reports that their new budget will bring government invested funding in R&D to £14.9 billion in 2021/22 . With the inclusion of the 130% super deduction in the budget, they are hoping investment spending could accelerate R&D.
This commitment to R&D also relies on the expansion of venture capitals. UK tech companies attracted a record USD15 billion in funding in 2020. As this sector gets bigger and broader, more startups are able to pop up – and stay afloat. While the government has shown its commitment to increasing innovation, they need companies to follow suit. Most R&D claims are concentrated in manufacturing, information & communication, and professional sectors. With just 60, 000 claims in the 2018/19 tax year, it is clear that there is a lack of companies applying for the tax relief. Is it because companies don’t think they qualify? Or because they can’t take on that financial risk? If venture capitals and investment managers took on a more portfolio-wide view to R&D, they might push for a broader range of investments.
Companies also often limit themselves, falling prey to the assumption that R&D is limited to those in lab coats. A new product, service, or process could qualify. Even a failed project might have started with R&D. The benefits that companies get from the R&D tax credit relief schemes can provide them with capital to invest back into their business, creating a cycle of innovation and improvements.
If the UK hopes to catch up to nations leading in R&D, it’s on the companies to actually perform the research, and on the government to help fund it. It seems the budget will make room for increased R&D – so if you own a business, you might want to consider claiming or getting involved in some innovation!