The UK is experiencing a crisis where firms are moving R&D activity abroad, according to research from business performance consultancy, Ayming UK.
The research – published in Ayming’s inaugural UK Innovation Barometer – reveals that 69 per cent of businesses have moved R&D activity abroad in the last year, and 70 per cent are planning to move activity abroad in 2023.
The findings raise serious questions about the attractiveness of the UK for R&D. The US, Germany, and France are the most popular destinations for this offshoring, selected by 28 per cent, 27 per cent, and 13 per cent of businesses, respectively. These are all major economic rivals to the UK, who are all competing for a finite amount of international R&D activity.
Directly contradicting the UK Government’s ambitions, the life sciences sector has moved the most activity abroad, with 94 per cent of businesses having moved activity overseas in the last year. Over half of life sciences firms have moved activity to Germany.
Mark Smith, Partner – Innovation Incentives at Ayming UK, says, “Amidst domestic turbulence, the emphasis on innovation has remained a notable constant across several governments. But, if the goal is to become a ‘Science Superpower’, we need to compete with the likes of the US and Germany in attracting R&D activity. If we don’t, UK firms will continue to offshore R&D to where access to capital and talent is easiest, meaning other regions will outgrow the UK as an R&D hub.”
Among a range of factors, firms are most likely to have been drawn to other markets by private funding opportunities, followed by more favourable R&D tax credit schemes and better access to talent.
However, the knock-on effects of HMRC’s clampdown on fraud also contribute to the problem. Thirty-five per cent of businesses have seen payments of R&D tax credits delayed, 24 per cent of businesses have had to reduce their R&D budget, and 19 per cent of businesses have delayed activity.
Partly in reaction to the fraud, the chancellor also announced cuts to SME R&D tax credits in November. But with tax credits being the second most popular reason for offshoring, the UK Government must tread carefully or risk further rises in offshoring among SMEs, who will be influenced by greater funding opportunities.
Smith says, “There are a number of strong factors that need to be looked at and acted on. We have an attractive environment, but it’s clear we have to go further. Above all, now is clearly not the time to be cutting back on R&D incentives, so I would urge the UK Government to strongly reconsider its cut to the SME scheme and find an alternative solution to its concerns around fraud.”
To retain activity and reverse any decline in the UK’s R&D status, businesses think it is most important to expand the scope of R&D tax credits, followed by digitising tax credit processes and facilitating collaborations lost from the UK’s exclusion from the Horizon programme, which is seen as even more important than backing up Horizon funding.
However, the research also uncovers overwhelming support for a new funding mechanism to support green R&D. Eighty per cent of businesses are currently not investing in sustainable/green R&D projects. As such, there is significant support for a supercharged tax incentive for sustainable R&D activity. Ninety-five per cent say it is important to the future of the UK’s innovation, with half of the total respondents saying it is very important.
Njy Rios, Director – R&D Incentives at Ayming UK, says, “A specific incentive for environmental R&D projects could be a very powerful tool. At the moment, all R&D activity is viewed the same. But if the UK Government established definitions about what constitutes environmental R&D and rewarded businesses through a super-charged tax credit, it could transform the UK’s green innovation. It’s a way of directly funding green innovation that would be much more effective than grants. No other country does this, and it would be two birds with one stone, providing a boost both to the UK ‘Science Superpower’ and Net Zero ambitions.”
For more information, the report can be downloaded here.
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Notes to editors:
Ayming, the international innovation and performance consultancy, combines highly specialised knowledge – across a range of fields – with hands-on collaboration to enable our clients and their people to go further.
We are 1300 employees operating in 15 countries across Europe, North America, and Asia. We have a proven track record of providing leadership and sharing insight for over 30 years. By focusing on innovation, finance and people, Ayming consistently delivers a strong return on investment.
Between 7-11th November 2022, Ayming conducted a survey of 200 senior innovation, finance, tax, and CEOs/MDs in the UK. Survey respondents are all at CXO, director or head of department level, and evenly split across SMEs (companies with 250 employees or fewer) and larger companies. Those surveyed span 6 sectors: manufacturing, IT and technology, construction & engineering, life sciences & pharmaceuticals, food & beverage, financial services and fintech. The splits between the sectors are all equal.