Home Brexit Why the UK needs to mind the innovation gap

Why the UK needs to mind the innovation gap

by William Garvey MD, Leyton UK
25th Mar 19 12:01 pm

The UK has a proud heritage of world-leading innovation, from the Industrial Revolution to the birth of the internet.  With Brexit uncertainty proving a drag on investment, however, the UK risks falling behind other countries in the research and development required now to power future growth.

Last week’s Office for national Statistics (ONS) figure of 1.69% expenditure on UK 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.  The UK is also underperforming in research and development investment related to the size of its economy, ranking only 11th despite being the fifth largest economy.

Why does this matter?  As we prepare for the fourth industrial revolution computing power is replacing man power.  Innovation lies at the core of everything that is potentially transformative, with huge leaps forward being made in areas such as AI, biotechnology and robotics.

For businesses, this innovation is proven to increase efficiencies and productivity gains. Universities UK commissioned a White Paper that indicated for every £1 of public investment, the economy benefits from £3 increase in overall productivity. This gain is recognised by economies like South Korea, Israel and Japan which respectively invest 4.3%, 4.2% and 3.4% of GDP in research and development. In quantitative terms, the USA, China and Japan invest the most.  A well-designed R&D strategy focused on cutting edge technology has placed them at the forefront of the international race for competitiveness. A race in which the UK is currently falling behind.

Government incentives

The UK Government has a number of established means to try and close this gap, including grant funding and tax incentives. 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 are designed to encourage greater spending in research and development, leading in turn to investment in innovation, while the Patent Box scheme works in a similar way, but is focused on incentivising companies when their intellectual property actually turns into business profits.

The way these schemes operate is by reducing a company’s tax bill through relief or credit linked to the company’s qualifying R&D expenditure or profits. It can then create a continuous pool of resources, generating further investment in innovation and ultimately contributing to the bottom line.

Analysis of the latest statistics show that despite an overall figure of less than £4bn per annum claimed for R&D tax credits, many smaller businesses are unaware that the work they are doing counts as research and development or innovation, with take up varying massively from sector to sector.  To put it into context, France’s equivalent scheme is worth roughly double ours.

What counts as innovation?

Analysis from Leyton indicates that many companies could be underclaiming due to a lack of understanding about what work legitimately qualifies. Very little of the funding for R&D comes from white lab coats, petri-dishes or smoking test-tubes. Research and development, as defined by the government, covers a much broader set of activities, including products, processes and computing, ranging from improvements to existing methods or the development of new methods.

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 more attractive, particularly in the current climate of uncertainty. The long-term potential gains will outweigh any initial outlay.

The STEM skills gap

More attention also needs to be paid to future innovators through the school system. STEM skills are the foundation for jobs in innovation in the future, yet worryingly the UK performs exceptionally badly in turning out STEM skilled graduates. We have seen this 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 a number of measures to help foster young talents, including the Apprenticeship Levy. Next month, we are coming to the end of the 2nd 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, while government incentives should be better designed with business practicality in mind and obviously, businesses need to work more closely with educators to make the link between these skills and jobs.

The UK is at a crossroads and while the future looks uncertain, encouraging investment in innovation is certainly the best way of future proofing itself.

William Garvey, MD, Leyton UK
Leyton UK is the UK’s leading innovation funding consultancy, we efficiently deliver value through expertise in R&D Tax Credits, Patent Box and Grants and employment law services through our associated company Leyton Legal.

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