Advice & Best PracticeComment

Why is the UK falling behind on R and D spending?

The UK will not hit its research and development (R and D) spending target of 2.4% of GDP until 2053 – 26 years later than its stated deadline of 2027 – a report by the CBI has warned.

R and D spending in the UK has hovered at around 1.7% of GDP for several years, rising only in line with inflation, ONS figures have shown.

This puts the UK behind 10 of its European neighbours with Sweden, Austria, Denmark and Germany all spending more than 3% of GDP on R and D. Stark comparisons can also be made with economic giants like South Korea at 4.6%, Japan at 3.2% and the US at 2.8%.

These are worrying statistics as strong R and D is fundamental to future economic growth, particularly in an increasingly tech dominated age. If we do not boost our R and D investment, the UK risks falling behind many of its global competitors.

This is a clear indication that the government needs to do more to incentivise R and D spending across the board, either through tax breaks and credits or regulatory advantages. Using these tools, they can fuel R and D spending by introducing policies that reduce risk and make investing in innovation more attractive.

Europe’s technology and IT sectors are particularly vulnerable to falling behind the US and China due to a lack of investment. Currently, not one of the world’s 15 largest digital firms is European and the US is likely to spend 175% more on IT development than western Europe between 2018 and 2022, market intelligence firm IDC has forecast.

Since much business growth is now reliant on advanced technologies such as AI to boost capacity and efficiency, this could leave European companies struggling to keep up. It could also undermine Europe’s status in helping direct and influence global standards and rules relating to technological innovations.

So, what can be done?

The CBI issued four recommendations to the UK government alongside its warning:

  • Take action to deliver the 2.4% GDP spending target by publishing a clear plan and long- term trajectory for government R and D spending.
  • Make it easier for businesses to access innovation support by creating a digital hub that clearly outlines the range of support available
  • Introduce measures to help businesses understand the potential value of their data and how they can capitalise on this value.
  • Deliver the world’s most competitive R and D tax credit by ensuring that it recognises the growing importance of data-driven R and D.

These are all sensible recommendations that could, if enacted sensibly, really turbocharge the UK’s R and D investment but they do not address one of the core issues – that many companies do not take advantage of the R and D tax credits that already exist.

The UK government introduced R and D tax credits in 2000 with the aim of rewarding and encouraging innovation among UK Plc. However, nearly two decades on, a huge percentage of potentially eligible businesses fail to claim the tax relief.

Our own research carried out last year showed that while nearly eight in ten SMEs in the UK were likely to be eligible for R and D tax relief, up to 55% of them were not claiming. Even by conservative estimates, this means millions of SMEs are missing out on valuable extra revenue.

The average R and D claim is worth £54,000 per year – a sum that could make a big difference to many business’s bottom lines and be reinvested to fuel further growth and innovation.

One of the major causes of widespread underclaiming is that businesses do not realise they are eligible for R and D, assuming it applies only to a narrow band of scientific and tech focused work.

In fact, the HMRC definition of R and D is a project can be shown as seeking to resolve a ‘scientific or technological uncertainty’. This can refer to a wide range of innovations across multiple sectors, in the form of a new process, product or service, or simply be an improvement to an existing one.

So, perhaps a good place for the government to start would be in promoting the current R and D
support available and better educating the business sector about the potential benefits of their innovative work.

This is where accountants can also play an important role.

Accountants should be careful to investigate and assess whether their client company carries out any work that could make them eligible for any form of tax relief – whether R and D, Patent Box or Capital Allowances.

It is the duty of an accountant to educate their client on such issues. While accountants cannot be expected to be experts in these fields, they should have a good overall understanding of what will qualify for the different forms of tax relief and, where necessary, can then refer their clients on to tax relief specialists to help them make the claim.

At the moment, this valuable extra revenue stream is too often overlooked and it means not only does the individual business lose out but the whole UK economy is underperforming in relation to R and D at a time when our economy needs to be stronger than ever.

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