Radeep Mathew, Head of Consulting at Leyton UK looks at the unrealised potential of R&D for British businesses post-Brexit
With the Government returned to power with a fresh and enhanced mandate, the need for a ‘post-Brexit economic policy’ is now urgent. In the new more uncertain world it is entering, Britain’s focus needs to be on maximising competitive advantage.
One area that is rife for potential exploitation is R&D. Encouragingly this is a view that seems to be shared by the Prime Minister. In November, Boris Johnson pledged to double Government research and development spending to £18 billion within five years as part of a “new wave of economic growth. His promise was to “level up” industry in the regions and lead a “clean energy revolution”.
The UK falling behind in R&D investment
The news is welcome and needed with the UK falling behind other European countries in its investment in R&D. In fact, the most recent ONS figures revealed the UK’s investment to be just 1.69% of national GDP, well below the European average of 2.07%.
The way the Government has encouraged companies to invest in R&D and tackle the shortfall is through R&D tax credits. The way the scheme operates is by reducing a company’s corporation tax bill on the company’s qualifying R&D expenditure or through a credit. This creates a pool of innovation resources for re-investment. The idea being this furthers the continuous innovation culture of the business and the country as a whole. The trouble is many companies are unaware about what counts as R&D.
‘Levelling up’ innovation funding claims
The most recently published HMRC results for the take up of R&D tax credits was a mixed picture. In the last full year of reporting (2016/17) the total number of claims rose to 52,335, an increase of 20% from 2015/16. Although the headline figure looks good, the challenge is there is an imbalance in the claims, between types of businesses, sectors and across the country. This is a challenge for a Prime Minister intent on ‘levelling up’.
R&D claims are concentrated in companies with a registered office in London, the South East or the East of England (46% of all claims and 61% of the total amount claimed). Meanwhile, while claims for SMEs went up 22% last year, there remains a lot less awareness about the scheme compared to more established larger companies. As a result of this knowledge gap, many are missing out on vital financial benefits. This can be the difference between profit or loss for many of these earlier stage companies.
In terms of sectors, ‘Manufacturing’, ‘Professional, Scientific and Technical’, and ‘Information and Communication’ have the greatest volume of claims, making up a total of 68% of claims and 73% of the total amount claimed for 2017-18.
Innovation in agriculture
Meanwhile, industries like architecture and agriculture are falling behind as they simply don’t realise that a lot of their work counts as R&D. Firms in agriculture claimed just £25 million on £140 million of expenditure last year. To put this into context, the top-performing sector, manufacturing, claimed for over £1.25 billion.
The problem is, despite pushing the boundaries of the industry, most firms view claimable activities as ‘day to day operations’. However, the reality of working in this field is that regular activity is likely to be innovative, due to the complexities of the challenges. This includes reducing any downtime and optimising soil quality to ensure there is no disruption to harvest and process throughout the year.
A further factor that requires an innovative approach and new thinking is the response to climate change. How will it be possible to counteract the seasonal changes without compromising crop yield? This is all vital R&D activity that is occurring, that the Government will reward but is simply not being claimed for.
R&D in architectural design
The same applies within architecture and housebuilding. In the last tax year, there were 2,025 claims for construction and a paltry 215 for real estate, generating just £145m in income. Combined, they were responsible for just 3.4% of the total amount claimed, despite making up 11.4% of the UK economy. Analysis of Leyton’s client base further highlights the knowledge gap. A large proportion of our clients in the sector have never previously claimed under the scheme. This is despite being in operation for years.
A reason for this is that architects also don’t consider that what they are doing is R&D. Actually what they are doing is overcoming engineering challenges. This involves the use of complex materials, from acoustics to energy efficiency. It includes balancing instructions from clients with the needs of regulations and physical limitations to what a building can do. These fundamental challenges include questions like how do you keep a building cool for hundreds of years to come?
There are numerous other examples from dentistry to life sciences to the video gaming industry. The common factors are low awareness of the scheme, combined with a lack of understanding about what counts as innovation.
Action to boost take up
If the Government wants to realise its goal of ‘doubling down on R&D’, as Boris Johnson has called for, there needs to be improved education and communication. To have any chance of hitting its ambitious target, the Government should also offer more financial incentives to companies prepared to invest in innovation. R&D can be a vital cog in the UK’s wheel as it embarks on a new path. Let’s realise its full potential.
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