Innovation forms the very foundation of science-based industries like chemicals, pharmaceuticals and renewable energy. And the bedrock of that innovation is research and development (R&D). While research-based institutions and industry can provide that R&D, it requires an appropriate environment in which to flourish. And here government has a major role to play, be it through favourable taxation, funding or regulation.
The UK Government has expressed a goal to make the UK a scientific and technological superpower, but many in the science sector have criticised its approach, for example, the changes to the R&D tax credit scheme, and the likely impact on the achievement of this goal. Research-based companies had hoped that the recent Budget would restore what they see as a vital mechanism to boost R&D.
But as Mark Tighe, CEO of innovation funding specialist Catax, noted: ‘By announcing that only loss-making SMEs spending 40% of their expenditure on R&D can benefit from a new higher level of tax credit, the Government is admitting that it cannot aspire to be a science and technological superpower while it disincentivises companies from innovating.’
‘These changes will not reset the impact that upcoming cuts to SME R&D tax relief will have on smaller innovating companies. However, it will reward some of those companies that have R&D at the heart of their business models and allow them to keep investing in innovation,’ Tighe said.
‘The bigger picture is that the Government still intends to streamline the R&D scheme into a single, simplified scheme for all companies regardless of size from April 2024. If the Government wants to protect growth in R&D spending, it must be careful not to deter SMEs from taking on the financial commitments that make innovation possible,’ he added.
But in addition to supporting purely domestic R&D, the Government also needs to recognise that successful R&D is executed through international collaboration. One of the previous key routes to this international approach has been the EU’s Horizon programme.
As Adrian Smith, President of the Royal Society, emphasised: ‘After a prolonged period of uncertainty, the Government urgently needs to deliver on its pledge to associate to Horizon Europe, and set out a longer-term, cross-party plan for science. This is vital to restore confidence among global research talent and investors that they should build their futures in the UK.’
‘We do have internationally recognised strengths in a range of sectors expected to transform society and the economy in the coming decades. The pledged reforms to R&D tax credits and support for fledgling companies to become globally competitive are important. Sustained government investment is also needed in basic research and discovery to fuel the innovations of tomorrow.’
The Chancellor’s Budget also included an announcement regarding the establishment of 12 low-tax economic development areas; something that was welcomed by the UK chemical industry, the majority of which is also located in these areas. The proposal will be funded using £960m in tax reliefs and grants over the next five years.
Smith added: ‘We would very much welcome universities and research institutions being central to plans for the 12 UK investment zones unveiled today. Developing research and innovation clusters around regions’ existing research strengths is key to increasing the prosperity in parts of the UK that have suffered from historic under-investment. Having the right skills in the right place will also be integral to the Government’s levelling up and science superpower ambitions.’
One aspect of the 2023 Budget that should find support as a way to address the issue of attracting investment is the ability of companies to offset investment cost in plant and equipment up to 100% against profit to reduce their tax burden. Matthew Fell, CBI Interim Director-General, commented: ‘Full capital expensing will keep the UK at the top table for attracting investment and puts us on an essential path to a more productive economy.’
In its pre-Budget submission to the Chancellor, the UK Chemical Industries Association had said: ‘In 2016, the UK received the second largest flow of inward Foreign Direct Investment (FDI) out of any country, behind only the US. In 2020 we’d slipped to 7th on the list, and just one year later we were 15th, behind European countries including Germany, France, Poland and Sweden. Without Government action now, we will continue dropping down the list. No major economy functions without a manufacturing sector.’
The pharmaceutical sector also gained something extra in the Budget – a boost for the Medicines & Healthcare products Regulatory Agency (MHRA), which is to receive an additional £10m to set up a faster approval process for pharmaceuticals. The intention is to encourage quicker UK approval for products already approved, for example, by the EU and US. As Mark Tighe pointed out: ‘Innovating companies are the ones taking the biggest risks, but they are also the ones that offer the biggest hope of building the UK’s technological future and growing GDP.’
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