Innovation: Are UK companies in danger of falling behind?

Innovation has been a hallmark of the UK’s scientific heritage. From the discovery of gravity to the industrial revolution to creating the internet, British scientists and inventors have led the world in innovative leaps forward, creating new industries and powering economic growth. However, the UK is in danger of falling behind, warns William Garvey, managing director of innovation funding consultancy Leyton.

In the last few years the UK has fallen behind in the research & development (R&D) landscape. The most recent Office for National Statistics (ONS) figure of 1.69% expenditure on R&D showed that the Government is below the European average and behind in terms of meeting its own target of 2.4% by 2027. This is of central importance as economies approach the fourth industrial revolution, where the power of computers is replacing manpower. Innovation lies at the core of everything that is potentially transformative, with technology disrupting industries and changing the way we live.

R&D tax incentives

For businesses, innovation is proven to unlock business potential, increasing efficiency and productivity. This is something recognised by economies like the United States and France who invest far more in R&D and have seen the benefit in economic output per hour. The UK's tax incentive scheme for R&D plays an important part in addressing this issue, and higher take-up would enable the UK to support growing industries of the future, including artificial intelligence (AI), robotics and 3D printing. 

Among tax incentives, the Research and Development tax credits (RDTC) initiative and the Patent Box scheme are well known among advisors. R&D tax credits have been developed to boost spending in research and development, creating a pool of resources that can be further invested, while the Patent Box scheme works in a similar way, but incentivises companies when their intellectual property results in business profits.

The way the schemes work is by reducing a company’s tax bill through relief or credit linked to the company’s qualifying R&D expenditure or profits. The most recent HMRC statistics show that the take-up has been mixed. In total for the last reporting period there were 39,960 R&D tax credit claims, and 34,060 of these were for the SME R&D tax relief scheme. This is over 85% of the claims coming from small and medium business in the UK. However, given SMEs make up 99% of all companies, arguably this is an underperformance. Additionally, 45% of all claims came from companies with a registered head office in London, the East of England or the South East. This resulted in 60% of the total amount claimed going to companies in these areas. 

Defining innovation

Analysis from Leyton indicates that many companies, particularly SMEs, could be underclaiming due to a lack of understanding about what work legitimately qualifies. It does not just refer to scientists in white lab coats and goggles working in isolation in labs. Research and development, as defined by the government, covers a broad set of activities, including products, processes and computing. This can be improvements to existing methods or the development of new methods.

Furthermore, an accountant-led process has been shown to realise less benefits in something as specialised and technical as R&D. It is the reason a host of specialist firms were set up to specifically focus on this regime, embedding themselves with businesses to conduct a root-and-branch assessment of what companies can claim. Many firms have seen this as a better way of accruing the benefits of the schemes.

Certainly, the Government could do more to promote the scheme, particularly among SMEs, who are the growing lifeblood of the country’s entrepreneurial workforce. It could also send out a signal by making Corporation tax incentives even more attractive, particularly in the current climate of uncertainty. The long-term potential gains will outweigh any initial outlay. 

The innovators of tomorrow

In the medium to long term more attention needs to be paid to the innovators of tomorrow. The UK’s underperformance in producing STEM skilled graduates is concerning. This is something Leyton has seen first-hand when talking to businesses in the UK where skill shortages hamper the speed of business growth.

The government has realised this and introduced several measures to help foster young talent, including the Apprenticeship Levy. We are coming to the end of the second year running of the scheme, yet this presents some ongoing issues about how the levy can be better utilised, including the 20% off-the-job training requirement. Where budget allows, additional support should be being given to these subjects in schools. More government incentives could be better designed with business practicality in mind, making the link between the subjects of today and the jobs and skills of the future.

With ongoing uncertainties caused by Brexit, the UK is reassessing its place in the world. Whatever the final destination, innovation needs to be a facet of the future, not just the past. 

Related: Global R&D spend surpasses $700 billion, but threatened by protectionism.