Stuart Weekes 10 Jun 2019 04:19pm

How government and universities can boost R&D spending

A report published by the CBI in May found that the government will fail in its target of raising Research & Development (R&D) investment to 2.4% of Gross Domestic Product (GDP) by 2027

The report found that, if R&D investment continues at the current rate of growth, the target would not be reached until 2053 – 26 years too late.

In many cases, R&D investment should qualify for R&D tax credits. At a time when UK businesses are facing economic uncertainty, R&D tax credits are extremely valuable and help many innovative businesses develop new ideas, products and services. Therefore, any barrier which prevents businesses from making use of the relief will have a significant impact on the UK’s overall productivity.

The worrying picture painted by the CBI is borne out by the relatively few number of companies currently claiming R&D tax credits. Approximately, 40,000 companies in HMRC’s most recent annual statistics are making use of the credit. It is encouraging that, in recent years, the number of companies claiming this credit has increased substantially, but there are many more that should be making use of the benefits it offers.

What the government can do

It is vitally important to the health of the UK economy that there is a vibrant culture of innovation. For ideas to progress, they require innovation. Innovation and creativity deliver solutions, and solutions commercialised increase output and GDP. R&D is the thread that connects these building blocks.

R&D should be the ‘partnership’ between industry and government. Companies invest in people and resources to carry out R&D and the government provides facilities and financial support. The R&D tax credit schemes are fundamental tenets of the support provided by the government.

R&D tax credits are available to any company subject to UK corporation tax that is seeking to make an advance in science or technology through the resolution of technical uncertainties. HMRC uses a ‘competent engineer’ as the benchmark of someone who can determine whether this work is routine or really an advance.

Under the SME scheme, for every £100 spent on qualifying R&D costs, loss-making companies can receive around £33, and profit-making companies can experience a corporation tax saving of £43.70. Companies claiming under the R&D Expenditure Credit scheme (RDEC) also benefit but at a much lower rate, typically around £8 or £9 for every £100 spent on R&D costs. In all cases, this is real cash that can be reinvested by the company.

The government needs to do more to encourage R&D investment. As an immediate starting point, it should review and ‘modernise’ the qualifying definition and qualifying costs, as well as improve the benefits of the tax credit schemes. This should motivate more companies to invest in R&D.

The role of universities

However, it is not just down to the government alone to make sure R&D is being used effectively. Other organisations, such as universities, have their part to play. There is increasing activity in creating ‘spin out’ companies in places such as Oxford.

These companies are created to develop and commercialise academic research undertaken by universities. This seems to be a buoyant time for universities - formerly seen only with Oxford and Cambridge, there are now many more universities who are ‘spinning out’ the work carried out by academics. This leads to more research and development activity.

For such companies, the opportunity to claim tax savings and, for many, cash refunds via the R&D tax credit schemes can be the life blood of the company, enabling them to reinvest in more R&D. 

What is clear is that there is a lot of innovation taking place. In many cases these are ‘ordinary’ people making an extraordinary impact and, in other situations, innovation oozes from academics carrying out their research. In all cases it is vitally important that all companies are aware that the R&D tax credit scheme may be available to them and they need to see the benefit of claiming the R&D tax credit.

HMRC’s proposed plans to limit the amount of tax refund certain companies can claim has the potential to adversely impact the start-up community. The question is whether this deters companies from investing in R&D if HMRC creates a barrier to making a claim.

Given the CBI predictions, the government should be making access to R&D tax credits easier rather than increasing the barriers to entry. Is it possible, that by improving the tax incentives, HMRC could help to make these targets a reality?

Stuart Weekes is a partner at national audit, tax, advisory and risk firm, Crowe.