UK Government R&D Tax Credits and VC funding: Navigating the complex landscape of innovation finance
In an age defined by rapid technological advancements and groundbreaking innovations, Research and Development (R&D) stands as the lifeblood of national progress and global leadership in applied research and innovation. With its rich history of scientific achievements, the UK is uniquely poised to excel in this dynamic landscape.
However, as global investment trends, particularly in Venture Capital (VC), undergo a transformation, the need for recalibrated strategies has never been more pressing. This article not only highlights the pivotal importance of substantial R&D investment but also makes a resounding call for policy reforms to elevate the UK's standing on the global innovation stage.
Government Investment: A call for visionary strategy
The UK government's commitment to R&D is commendable, with ambitious funding goals of £20 billion per year by 2024-25 and a trajectory toward £22 billion by 2026-27 (1). These initiatives lay a solid foundation for the nation's innovation-driven future. Government support takes various forms, including grants, funding programs, and tax credits. For instance, the R&D Tax Scheme, in operation since 2000, has played a vital role in encouraging investment in UK innovation, contributing significantly to the nation's economy. In 2020 alone, an astounding £61.8 billion flowed into R&D in the UK (2).
However, it is imperative that this funding is utilised wisely. A pressing concern is the rampant errors and fraud in the R&D tax credit scheme (4.9% of the total value in 2021/2(3), diverting funds towards unintended recipients. The government's recent revisions to the R&D tax credit scheme (4) are welcome steps in the right direction, but more must be done to ensure that every penny is effectively utilised.
The transition towards a unified Research and Development Expenditure Credit (RDEC) (5) scheme promises a streamlined approach, fostering a more cohesive ecosystem. Furthermore, the prospect of enhanced relief rates for R&D-intensive companies is a step in the right direction, acknowledging the transformative power of research and innovation.
Pursuing excellence: A resounding call for greater R&D investment
R&D expenditure as a percentage of GDP offers crucial insights into a nation's innovation commitment. While the UK has achieved its 2.4% target (6), it lags behind countries like Germany, the United States, and South Korea. The government's R&D expenditure remains below the OECD average, highlighting the need for accelerated investments to match international benchmarks. Increasing R&D expenditure is not just an economic necessity; it is a strategic imperative to bolster the nation's competitive edge.
Venture capital funding: Confronting challenges, embracing opportunities
The need for government investment in innovation becomes even more apparent in light of the challenges facing the UK's economy, resulting in a decline in equity finance investment. Venture capital investment in the UK has encountered hurdles due to factors such as overvaluations, the impacts of Covid-19 and Brexit, and rising interest rates.
This decline has led to a slowdown in the creation of tech unicorns. In 2022, the growth rate of UK tech unicorns, companies valued at over $1 billion, plummeted to just 4 per cent (7), compared to the previous year's impressive 41 per cent growth rate. This decline can be attributed to reduced venture capital availability and companies adjusting their valuations to raise funds.
However, amidst these challenges, a glimmer of hope shines through in climate tech investment. Climate tech received a remarkable £6.54 billion (8) in venture capital investment in 2022, offering a strategic avenue for targeted funding.
Even in the face of fluctuations, the UK's startup ecosystem has shown remarkable resilience, raising $30 billion by the end of 2022. The UK's ability to weather a 28% decline in venture capital investment, compared to a global decline of 32%, underscores its adaptability and innovation prowess (9).
Bridging the equity finance gap: Sector-specific potential
A closer examination of the UK's equity investment market reveals intriguing trends deserving of attention. While the market has witnessed a decline in deal numbers and values, certain sectors present promising growth opportunities. AI and cleantech sectors, with their impressive deal counts, underscore the potential for strategic investments.
Private equity and venture capital firms continue to play a significant role in driving investment activity, participating in 40.3% of all deals (10). Crowdfunding platforms have displayed adaptability, experiencing a 56.1% increase (11) in the last quarter, signalling a dynamic sector with untapped potential.
Climate tech revolution: Paving the way for sustainability
Amidst the challenges and opportunities, climate tech emerges as a transformative force in the UK's innovation landscape. The UK's position as the second-largest hub for climate tech startups and scaleups globally (behind the US) showcases its potential for addressing pressing global challenges. The impressive $10 billion raised in Europe by climate tech companies in 2022, with $6.54 billion attributed to UK companies (12), underscores the sector's growth trajectory.
As climate tech investment matures, the UK's capacity for innovation becomes increasingly evident. With over 5,200 climate tech pioneers (13) operating in the UK, the nation's commitment to a sustainable future is undeniable.
While climate tech has proved remarkably resilient, it is not completely immune to economic downturns. The first half of 2023 saw a 43% dip (14) in investment compared to the same period in the previous year. This underlines the critical role of government support in R&D.
Even-proof sectors like climate tech, investment fluctuations can happen. In such cases, consistent government support, like R&D funding, provides stability and encourages meaningful innovation. It's a powerful reminder that the government plays an essential role in fostering an innovation-friendly environment.
Looking ahead to a holistic ecosystem for Startups and SMEs: A policy imperative
To boost the UK economy with applied R&D, collaboration between the government, tech sector, and businesses is crucial. Creating a supportive ecosystem for startups and SMEs, including mentoring and regulatory support, is essential for building the UK as a global research and innovation hub. Policy reforms are needed to drive R&D investment and secure the UK's position as a leader in sustainable technology. Let's seize this opportunity and propel the nation into a new era of innovation and progress.
techUK – Unleashing UK Tech and Innovation
The UK is home to emerging technologies that have the power to revolutionise entire industries. From quantum to semiconductors; from gaming to the New Space Economy, they all have the unique opportunity to help prepare for what comes next.
techUK members lead the development of these technologies. Together we are working with Government and other stakeholders to address tech innovation priorities and build an innovation ecosystem that will benefit people, society, economy and the planet - and unleash the UK as a global leader in tech and innovation.
For more information, or to get in touch, please visit our Innovation Hub and click ‘contact us’.
Tech and Innovation Summit, 6 Nov (rescheduled date)
Emerging technologies will be debated and explored at our annual Tech and Innovation Summit, taking place on 6 November. This campaign week will directly feed into the themes discussed at the Summit.
techUK’s flagship Tech and Innovation Summit returns to traverse the extraordinary and ground-breaking discoveries made possible by the application of emerging and transformative technologies.
Upcoming events:
Gaming & Esports Technologies of the Future
National Videogame Museum, Sheffield Panel discussion
A Black Lens: Exploring Representation In The Future of Extended Reality (XR)
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techUK's sprint campaigns explore how emerging and transformative technologies are developed, applied and commercialised across the UK's innovation ecosystem.
Activity includes workshops, roundtables, panel discussions, networking sessions, Summits, and flagship reports (setting out recommendations for Government and industry).
Each campaign runs for 4-6 months and features regular collaborations with programmes across techUK.
This campaign explored how the UK can lead on the development, application and commercialisation of space technologies and ultimately realise the benefits of the New Space Economy.
These technologies include AI, quantum, lasers, robotics & automation, advanced propulsion and materials, and semiconductors.
Activity has taken the form of roundtables, panel discussions, networking sessions, Summits, thought leadership pieces, policy recommendations, and a report.
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Rory Daniels
Rory Daniels
Rory joined techUK in June 2023 after three years in the Civil Service on its Fast Stream leadership development programme.
During this time, Rory worked on the Government's response to Covid-19 (NHS Test & Trace), school funding strategy (Department for Education) and international climate and nature policy (Cabinet Office). He also tackled the social care crisis whilst on secondment to techUK's Health and Social Care programme in 2022.
Before this, Rory worked in the House of Commons and House of Lords alongside completing degrees in Political Economy and Global Politics.
Today, Rory leads techUK's emerging technologies activity across everything from immersive, web3, AI and robotics to space, gaming & metaverse.
This involves co-running techUK's flagship Innovation campaign, managing four series (including the 'Meet the Innovators' interview series), and launching 4-6-month 'sprint campaigns' on transformative technologies and sectors.
- Email:
- [email protected]
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- https://www.linkedin.com/in/rorydaniels28/
This campaign has explored how the UK can lead on the development, application and commercialisation of the technologies set to underpin the Gaming & Esports sector of the future.
These include AI, augmented / virtual / mixed / extended reality, haptics, cloud & edge computing, semiconductors, and advanced connectivity (5/6G).
Activity has taken the form of roundtables, panel discussions, networking sessions, Summits, and thought leadership pieces. A report featuring member case studies and policy recommendations is currently being produced (to be launched in September 2024).
Get in touch below to find out more about contributing to or collaborating on this campaign.
Upcoming events
Gaming & Esports Technologies of the Future
National Videogame Museum, Sheffield Panel discussionEvent round-ups
Insights
Get in touch
Rory Daniels
Rory Daniels
Rory joined techUK in June 2023 after three years in the Civil Service on its Fast Stream leadership development programme.
During this time, Rory worked on the Government's response to Covid-19 (NHS Test & Trace), school funding strategy (Department for Education) and international climate and nature policy (Cabinet Office). He also tackled the social care crisis whilst on secondment to techUK's Health and Social Care programme in 2022.
Before this, Rory worked in the House of Commons and House of Lords alongside completing degrees in Political Economy and Global Politics.
Today, Rory leads techUK's emerging technologies activity across everything from immersive, web3, AI and robotics to space, gaming & metaverse.
This involves co-running techUK's flagship Innovation campaign, managing four series (including the 'Meet the Innovators' interview series), and launching 4-6-month 'sprint campaigns' on transformative technologies and sectors.
- Email:
- [email protected]
- LinkedIn:
- https://www.linkedin.com/in/rorydaniels28/
Running from July to December 2024, this campaign will explore how the UK can lead on the development, application and commercialisation of web3 and immersive technologies.
These include blockchain, smart contracts, digital assets, augmented / virtual / mixed / extended reality, spatial computing, haptics and holograms.
Activity will take the form of roundtables, workshops, panel discussions, networking sessions, tech demos, Summits, thought leadership pieces, policy recommendations, and reports.
Get in touch below to find out more about contributing to or collaborating on this campaign.
Upcoming events
Event round-ups
Guest insights
Get in touch
Rory Daniels
Rory Daniels
Rory joined techUK in June 2023 after three years in the Civil Service on its Fast Stream leadership development programme.
During this time, Rory worked on the Government's response to Covid-19 (NHS Test & Trace), school funding strategy (Department for Education) and international climate and nature policy (Cabinet Office). He also tackled the social care crisis whilst on secondment to techUK's Health and Social Care programme in 2022.
Before this, Rory worked in the House of Commons and House of Lords alongside completing degrees in Political Economy and Global Politics.
Today, Rory leads techUK's emerging technologies activity across everything from immersive, web3, AI and robotics to space, gaming & metaverse.
This involves co-running techUK's flagship Innovation campaign, managing four series (including the 'Meet the Innovators' interview series), and launching 4-6-month 'sprint campaigns' on transformative technologies and sectors.
- Email:
- [email protected]
- LinkedIn:
- https://www.linkedin.com/in/rorydaniels28/
Campaign Weeks
Our annual Campaign Weeks enable techUK members to explore how the UK can lead on the development and application of emerging and transformative technologies.
Members do this by contributing blogs or vlogs, speaking at events, and highlighting examples of best practice within the UK's tech sector.
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