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UK to miss R&D investment target by £19 billion

04 September 2019

At the current pace of investment, the UK will miss its 2.4% R&D target by £19 billion in 2027 according to a new report by the CBI.

In Untapped Investment, the business group says that ensuring the R&D tax credit keeps pace with the changing nature of R&D and our international competitors will help spur private sector investment to close this gap. Business investment in R&D is helping to tackle the biggest issues of our generation, from climate change to the future of transport.  

The tax credit has already proven it is effective in spurring private investment. In 2016/2017 so far R&D tax incentives cost the government £3.4 billion supporting a return of £24.9 billion of expenditure, more than 7 times the cost to the government.

But the R&D landscape is changing, from increasingly using data and analytics, to outsourcing R&D activity to companies with specialist skills. At the same, it involves significant up-front capital costs that can deter investment from taking place.

As the country prepares to leave the EU, against the backdrop of slowing global growth and declining business investment, it has never been more pressing to support firms to innovate and get the UK economy firing on all cylinders. If the UK is to reach its 2.4% target, the CBI is calling on the Government to:

Widen the scope of eligibility for the R&D tax credit to include:

Capital expenditure

Data driven innovation

Outsourcing of R&D activities, where this is not already captured

Upskilling and retraining of staff

Review the availability of data on private sector R&D investment to help monitor and evaluate the effectiveness of government R&D policy

Regularly benchmark the R&D tax regime against international peers to ensure the UK remains competitive.

Annie Gascoyne, CBI Director of Economic Policy, said: “For the past ten years the UK’s productivity has been severely lagging behind its international peers. With productivity proven to have a knock-on effect on pay and living standards, boosting it cannot be put on the backburner any longer. Part of the answer is to kickstart business investment, and one area of untapped investment is R&D. 

“For many businesses the significant upfront capital costs are stopping them from investing more in R&D.  Pound for pound, the R&D tax credit drives more investment by business than it costs the Government. The tax credit could be the motor to propel the economy forward - but only if it keeps pace with the changing nature of R&D, so it must widen in scope, if the UK is to remain a world-leader in innovation.  

“Improving the R&D tax credit is only one part of the story, and the CBI will be looking to Government at the spending review to set out a roadmap of how to meet the 2.4% target.”

Using the R&D tax credit to boost investment 

HMRC data shows that for every £1 the Government foregoes in providing the R&D tax credit, private R&D investment increases by between £1.53 and £2.35.

Businesses continually cite a country’s R&D tax incentive system as an important factor when deciding where to locate and invest. There are two significant ways the UK’s R&D tax system can be enhanced:

By widening its scope to include the following four areas:

Capital expenditure: Engaging in R&D can often require significant capital investment in facilities and equipment before staff costs are even factored in

 Big Data and Advanced Analytics: Innovation is increasingly becoming more data-driven and less focused on traditional methods of R&D i.e. labs

Outsourcing: R&D is often delivered by extensive collaboration between business, universities, public sector bodies. This includes outsourcing different R&D activities by businesses to access expertise and specialists

Upskilling and training: R&D investment require highly skilled researchers and other professionals. Ensuring staff have the right levels of training can be a significant cost for businesses undertaking R&D. 

By monitoring the impact of the UK’s R&D tax incentive regime 

The Government should continue to sense check the impact its tax regime is having on the UK economy, so that incentives deliver on their objectives and are value for money for the taxpayer. This can be done through:

Availability of data: Ensuring the appropriate data is available is important to be able to robustly measure the effectiveness of the R&D tax credit; and 

International benchmarking: For the UK to maintain its competitiveness for attracting R&D investment, it is important to keep pace with other countries.