Mark Smith, Partner for Innovation, shares his views on what the latest budget means for business and the innovation funding landscape.
R&D Tax Credits
It’s encouraging to see the Government put such a strong emphasis on R&D as mechanism for stimulating the economy and we welcome the change of rates from 12% to 13%. The chancellor says we want to invest in ideas, and R&D incentives will make that happen. Increasing funding for innovation in this way will draw investment to post-Brexit Britain and boost productivity. The economic benefits of R&D investment are well documented, but the UK is currently significantly behind many of its counterparts and way off its self-imposed target. If we’re to succeed in becoming the science and innovation powerhouse that we are clearly striving to be, then we need to be an attractive place for R&D activity.
Fundamentally, the figures from the Government still won’t get us to our 2.4% target – direct spending from the Government would only take us to about 0.8%, meaning the other 1.6% must come from businesses. Additionally, this rate rise only applies to large business. Although the R&D activity of big businesses accounts for a large portion of the UK’s overall spending, the vast majority of the UK economy is SMEs and there was not much else in this budget which supports innovation for these businesses.
We’re also pleased to hear about the consultation on R&D cost criteria and look forward to the resulting changes. The cost rules were written 20 years ago. That’s the same year the world saw the first camera phone and cloud tech didn’t exist when these rules were first drafted. We are now well into the digital era and the criteria are in drastic need of an update. The UK is a hot bed for leading technological research, so we need to update the rules now and on a regular basis, especially across IT and software.
It’s particularly good to see the chancellor acknowledge plans to boost regional R&D activity, looking beyond just infrastructure to rebalance the economy. There continues to be a brain drain whereby talent and growth-businesses trickle to London. It’s an unhealthy situation, drawing entrepreneurs and the jobs they provide away from the regions.
We are not yet making full use of the fantastic facilities and world-leading universities that we have spread across the country. What’s needed is an environment that not only fosters, but directly rewards and encourages local businesses and innovation. If the Government can incentivise local research and support the subsequent commercialisation of any inventions, there will be a huge opportunity for us to capitalise on our existing resources.
Following the election, regionalism was always going to be a big theme for this Budget. Boris is a huge fan of infrastructure projects and there’s no doubt that improving local infrastructure will give these economies a boost. The figures involved are impressive and beginning a more united approach to transport across the different regions, mimicking that of London’s TFL by creating similar authorities, will certainly be a positive thing. Having wider collaboration at a regional level rather than the council level will create a stronger infrastructure.
However, it’s all well and good outlining huge nationwide infrastructure spending but these projects rarely run on time or budget. If the Government sticks to the same processes as they always have done, then it will be the same this time around. For example, legal fees for these projects are often much higher than they should be. Research commissioned from the CBI found that the construction industry spends about 1.6% of its total expenditure on legal services. This is double the UK median and is close to two-thirds of the average margin made by the highest contractors in 2018.
The Government needs to procure in a much more effective way and should incentivise innovation in construction to boost productivity in the sector and meet sustainability targets. This will allow the UK to achieve these ambitious infrastructure aims and for these projects to become an economic boost as opposed to a capital drain.
There’s little doubt that we’re on the cusp of a climate disaster so it’s encouraging to hear such intentions to make the UK a green economy. There has been lots of ambitious talk of carbon neutrality from the Government with legally binding targets to become net zero by 2050, and rightly so. But without support from businesses, these ambitions will remain a fantasy. Whether it be carbon capturing technology or more sustainable food cultivation, business-led innovation is going to have to play a pivotal role in getting us through what lies ahead.
Not only should we be incentivising research in environmental technology, but the Government must create the friendliest possible environment to facilitate the transition to a green economy. For example, we have known about the need to increase investment in electric vehicle infrastructure for a long time. We risk being left behind unless we are much quicker to adapt to the economic requirements of the time.
The UK could be the next world leader in some of these green technologies, which would provide a huge opportunity after Brexit. The future is sustainable, and businesses at the forefront of that trend will benefit enormously.
Rumours had been circulating of a new funding agency. If you ask me, grants are not the best mechanism for boosting business innovation. These funding bodies tend to be bureaucratic and slow, meaning they are often behind the times. They are run by civil servants who can be disconnected from the field they are financing and, therefore, might not have a full grasp of where the money would be best invested.
It’s not yet clear whether we will remain a part of the EU wide agency, Horizon. Sure, being part of it would have its benefits, but it’s not a game changer. In my experience, it’s very hard for people to successfully secure funding from big agencies. Application processes are long and onerous so, ultimately, it’s not worth it for most companies. R&D tax credits are a much more successful as an incentive for business innovation and, with the UK being so far off spending targets, there’s essentially no limit to the credits and the incentives can be applied much more broadly.
Having said this, a smaller UK-only agency could be more beneficial to the UK than the likes of Horizon, providing it is run right. The government should endeavour to consult UK experts and businesses to find out how to make this have a big impact. If the new ARPA-like agency has less red tape and was truly agile in its approach to funding ground-breaking projects, it could be very effective.
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