London, 5th March 2024: UK businesses believe Labour will have a positive impact on UK innovation, according to research based on a survey of over 600 business, finance and innovation leaders from innovation funding consultancy, Ayming UK.
Ayming’s UK Innovation Barometer 2024 reveals that 79% think a Labour Government will have a positive impact on UK innovation. Less than 5% expect the impact to be negative.
Despite being a priority for several successive Governments, the UK’s R&D landscape has suffered some setbacks over the last few years. The UK’s membership of the EU’s cutting-edge Horizon programme, which provides both funding and access to important collaborations, was collateral damage following Brexit – and whilst the UK has now rejoined the programme, the damage to public confidence in it as a source of funding has been done.
Increased HMRC scrutiny
In addition, there are ongoing problems with the UK’s innovation funding, specifically with the R&D tax credit scheme. HMRC has pursued an aggressive compliance programme in reaction to cases of fraud in the R&D schemes, causing friction with some businesses.
According to Ayming’s research,
- 23% of firms have recently had payments from HMRC delayed. In addition,
- 25% say their recent experiences with HMRC has put them off from claiming R&D tax credits.
This is particularly problematic considering R&D tax credits are the most popular source of innovation funding, used by 28% of UK firms surveyed.
Benjamin Craig, Associate Director – R&D Tax Credits, at Ayming UK, says, “This should serve as a wakeup call. It’s all well and good saying R&D is a priority, but businesses clearly haven’t felt supported and the Government’s track record on innovation isn’t exactly gleaming. There’s a real opportunity for Labour here if they can put forward a vision. What is the plan for the next 10 or 20 years? How can they solve some of the ongoing challenges and really supercharge business innovation? Innovation is central to economic development and therefore should be a priority for any government, regardless of party.”
HMRC’s excessive pushback on claims has also caused confusion around eligibility, with 18% saying they will not be claiming because they are no longer sure what is eligible. But this confusion is on track to escalate due to the lack of awareness about upcoming reforms.
The new merged scheme
As of April 2024, the Government is merging the SME scheme with the RDEC scheme and reducing the rates of relief for SME claimants from 130% to 86%, with a further reduction in the payable credit rate for most SMEs from 14% to 10%.
That means the cash benefit for these companies has nearly halved.
However, the research shows widespread lack of awareness and understanding about the reforms.
- 58% of businesses are unaware of the reforms while
- 22% say they are aware of the reforms but are not sure how they will impact their business.
Craig continues, “This confusion is a big risk. It means people will either disengage with the scheme or may submit applications that are inaccurate, increasing the number of faulty claims that has caused HMRC so many problems. HMRC must work with firms to build their understanding of changes to the rules. If they don’t, we will inevitably see further problems with the R&D schemes in the coming months if not years.”
Confused about the merged scheme? Check out our free on-demand webinar Mastering the new merged R&D tax scheme
Can Britain be considered a ‘Science Superpower’?
Almost exactly a year ago, the Government unveiled its latest plan to make Britain a ‘Science Superpower’ – the Science and Technology Framework. But businesses have yet to see this policy translated into positive impact on innovation.
Similarly, the last detailed Innovation Strategy was published in 2021 and since then there have been two changes of Government, five different ministers responsible for innovation, and the department that published the initial strategy has been disbanded as part of reforms.
Ayming’s official Manifesto For Innovation contains a critical overview of the Government’s innovation strategy and provides expert recommendations on how to re-ignite UK innovation.
The need for homegrown talent
In particular, the Government needs to address the need for STEM talent. Innovation depends on people and, with R&D growing in complexity, businesses often need to look externally for specialist skills and talent. Many companies import R&D talent and the Government has introduced a “highly skilled” visa, which 20% of companies have used to hire people from overseas in their R&D team. However, the UK needs to develop homegrown STEM talent, which is the action businesses are most likely to view as ‘critical’ to improving the UK’s R&D landscape, at 26%.
Njy Rios, Director – R&D Incentives at Ayming UK, says, “Importing talent is a short-term fix to a long-term problem. The need for homegrown STEM is well known. We need to introduce initiatives to encourage children into STEM fields now in order to reap the benefits when people finish studying. But policies like this are often too forward-thinking for those in Government, who tend to think in 5-year election cycles rather than the longer term.”
Re-shoring R&D
The overall problems with the UK’s R&D landscape are leading to widespread offshoring of R&D activity. According to the research, UK firms are now more likely to innovate abroad than in the UK, with 79% of businesses doing R&D activity abroad this year compared to 57% in the UK.
The most popular country for offshoring is the USA, with 11% of companies carrying out R&D there. This is followed by Australia and Poland at 9% and 8% respectively. However, 57% of firms doing activity in a European country, meaning Europe is by far the most popular destination for UK R&D when taken as a bloc.
Large companies are much less likely to innovate in the UK. Whereas the findings for innovating abroad are relatively similar, only 33% of large businesses are innovating in the UK compared to 69% of SMEs.
Mark Smith, Managing Partner at Ayming UK, says, “Offshoring R&D is nothing new; and it’s often necessary. But finding a way to encourage businesses to conduct R&D domestically is essential if the UK is ever going to credibly rival its international competitors. Despite being a major policy focus for successive governments, today the UK’s aspiration of becoming a Science Superpower remains a pipe dream. And until businesses see policy translate into progress, unwanted offshoring will continue to stall these ambitions whilst UK innovation flounders.
For more information, the report can be downloaded.
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Notes to editors
About Ayming
As a professional services company, Ayming partners with businesses and institutions around the world to unlock lasting value, year after year. Translating complex policy into opportunities, while managing the transformation that comes with growth.
Our team is over 1,300 experts in Innovation, HR, Taxes and ESG. We have specialised knowledge and decades of experience in international and local policy across 14 countries. Our premium services create new possibilities for investment. And our approach goes beyond consulting, collaborating in the field with clients of all sizes and sectors. So we can deliver tangible results driven by trust – now and for years to come.
About the research
Between 12th and 18th December 2023, Ayming conducted a survey of 603 senior innovation, finance, and CEOs/MDs in the UK. Survey respondents are all at CXO, director or head of department level. There were 397 SME respondents and 206 from large businesses. Those surveyed span across 6 sectors: manufacturing, IT and technology, construction & civil engineering, life sciences & pharmaceuticals, food & beverage, financial services and fintech. The splits between the sectors are all equal.
