Are we getting closer to achieving the target for the UK to invest 2.4% of GDP in R&D by 2027?
The Government’s Plan for Growth sees innovation as one of the key pillars of growth for the post-COVID and post Brexit economy. To help steer this goal the Government has set a target of achieving 2.4% of GDP being invested in R&D by 2027. Increasing this from the 2018 level of 1.7% of GDP invested in R&D will mean achieving the fastest increase in R&D spending in over 20 years.
To put this in perspective, OECD data shows that R&D investment as a share of GDP in the UK stands behind the leading R&D nations of Israel and South Korea who each spend over 4%, and countries like Austria, Japan, and Switzerland, who all spend over 3%. The OECD average spending during 2020 was 2.68% as a share of GDP.
Global competitors are investing more in R&D than the UK as a proportion of their economy, putting the Innovation Strategy's goal of making the UK a global hub for innovation at risk. While we have seen welcome increases in public sector commitments to invest in R&D such as the recently announced £25 billion R&D budget allocation for UK Research and Innovation, ensuring private sector investment continues to rise will be vital to achieving the 2027 target.
Why is R&D important for the UK economy?
R&D is a key driver for long-term economic growth. Investment in R&D and innovation will help drive economic growth and create the jobs of the future. Evidence shows that R&D stimulates innovation, which is positively associated with better productivity outcomes. This will be key considering the UK has a 17% productivity gap with the US and 12% with Germany, and with a productivity growth that has been essentially static over the past ten years.
R&D activities has the potential to generate spillovers to the wider economy. R&D has a compounding impact that is felt throughout the UK economy. For example, every £1 spent on public R&D unlocks £1.40 of private R&D investment, together delivering £7 of net-economic benefit to the UK.
R&D is key to ensure the UK’s position as global leader for innovation. The UK is globally recognised as a leader in research and innovation, having the most productive science base in the G7 based on field-weighted citations impact and research papers produced per unit of R&D expenditure. With global competitors heavily investing in R&D, the UK must ensure that it does not rest on its laurels if it wants to keep and enhance this position.
R&D is key to tackle the challenges of the future. As proven during the COVID-19 pandemic, where R&D investment was critical to discovering, developing, and testing vaccines that helped contain the virus, R&D will continue to be critical to overcoming future challenges, such as the transition to net zero or the growth of emerging sectors and most innovative companies, thereby helping to sustain employment, our communities, and the environment.
UK Government support to R&D
Since the publication of the UK Research and Development Roadmap, we have seen welcome increases in public sector commitments to invest in R&D, driving forward the government’s ambitions to strengthen the R&D system and cement the UK’s position as a science superpower and innovation nation.
At the Budget and Comprehensive Spending Review 2021, the government committed to increase public R&D investment to record levels of £20 billion by 2024-25, and in March 2022, the Government announced plans for the largest ever R&D budget, with a £39.8 billion R&D budget for 2022-2025.
The bulk of this budget, £25 billion, was allocated to UKRI and it is expected to be distributed across UKRI's councils and key programs to deliver its five-year strategy. This includes:
- a £16.8 billion investment over the 3-year period through core budgets for UKRI’s 7 Research Councils, Research England and Innovate UK
- a £2 billion investment over the 3-year period for a new collective cross-council approach to talent initiatives
- a £2.9 billion investment over the 3-year period in infrastructure projects
The UK Government has also sought address regional misallocations in public R&D investment. As set out in the Leveling Up White Paper, by 2030, domestic public investment in R&D outside the Greater South East will increase by at least 40%, and over the Spending Review period by at least one third.
techUK believe these announcements make significant progress towards the government’s ambition to spend £22 billion on R&D by 2026-27 and towards achieving the economy-wide target to invest 2.4% of GDP in R&D in 2027.
What about business investment in R&D?
Public spending is only part of the equation. Key to achieving the 2027 target is to create the right conditions for UK companies to invest more in R&D. As set out in the UK Innovation Strategy, while the UK has some highly innovative companies, private sector innovation spending is relatively low (0.9% of GDP), compared with the OECD (1.5% of GDP). Private investment in R&D, however, has grown steadily in the last 10 years, and in 2018 accounted for 68% of all investment in R&D.
Tech companies place a high value on innovation and consider conducting R&D activities a fundamental driver of their business models. In our Digital Economy Monitor survey Q1 2022, 76% of techUK members said that doing R&D in the UK is important or extremely important for their business. However, members highlighted several barriers that are hindering businesses from meeting their R&D objectives and have called for more government support to unlock R&D investment in the UK.
So far, the Treasury has done good work with the announced reforms that ensure the UK’s R&D tax credit captures R&D activities that are part and parcel of a modern high-tech business such as data costs and cloud computing. This means that companies can finally use the UK’s R&D support system to cover data driven research, which is good for science, product development and productivity.
However, there is more the UK can do to stimulate business investment in R&D. techUK recommends:
(1) Expand the coverage of the R&D tax credit to cover capital expenditure
R&D credits for capital expenditure would support the investment in physical assets within the UK for undertaking R&D. This will mean higher growth and stronger public finances.
A conservative modelling of this tax reform suggests that private sector R&D will be raised across industries by £1.2bn per year and UK GDP will be raised by £4bn over 10 years. Moreover, while the initial cost would be around £430m a year, additional tax revenues generated through higher GDP would mean the policy is cost neutral by year seven.
The incentive would drive future significant investment decisions within the company with the added benefits for the economy through capital investment in the UK. As a policy, the support for capital expenditure would herald a long-term commitment to innovation drawing foreign direct investment into the UK following our departure from the EU.
(2) Review of the UK Patent Box to incentivise R&D among SMEs
Government could go further to modernise the UK’s R&D incentives through changes to the Patent Box (PB) scheme. The scheme is a valuable part of the UK’s innovation incentives by encouraging companies to extract value from their IP by marketing a new product production method, or service, that they have patented. This brings tangible benefits to the UK and the wider economy and the UK’s PB is the only R&D scheme that currently incentivises this activity.
However, given the changes in how companies innovate since the patent box was introduced in 2013, techUK believes reforms to the Patent Box could make it more suited to modern software and data-based R&D that relies increasingly on iterative innovation rather than patents. Changes to improve the patent box could include the inclusion of a wider range of IP rights (as it is done in the Dutch Innovation Box), including software, copyright materials and inventions that may not be patentable.
Of the companies that claimed this relief in tax year 2018 to 2019, 28% were classified as ‘Large’, but these companies accounted for most of the relief claimed (92%). Reviewing this scheme could increase the uptake among SMEs, tech start-ups and scale-ups who would be more likely to benefit from these wider range of IP rights. Furthermore, exploring ways to improve the governance of Patent Box – including promoting it, monitoring, and managing administrative burdens – would help ensure the scheme continues to play a key role within the UK’s structure for R&D incentives.
Despite many positive developments, like the increased public investment in R&D and new incentives for businesses to invest more in R&D in the UK, there are still several challenges to overcome to meet the R&D 2027 target. techUK will continue to work with HMT and other Government departments to ensure that the UK R&D tax system is globally competitive, and that the UK maintains its position as a science superpower and innovation nation.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.