The Changing Nature of Innovation Funding Is Affecting R&D Tax Credits

The Changing Nature of Innovation Funding Is Affecting R&D Tax Credits

The United Kingdom faces a productivity conundrum. Once one of the most powerful economies on the planet, the UK has seen its productivity and economic growth lag behind global peers in recent decades.

A government report in 2015 pointed out that labor productivity in the UK had nearly flatlined since 2007. The country’s productivity was 17% lower than the G7 average. And it was also 31% behind the US, 28% behind Germany, and 27% behind France in terms of productivity. Stagnant productivity growth has a negative effect on real incomes and living standards across the country. This issue is now at the core of the government’s economic plans.

Economists suggest a simple remedy for this problem: innovation.

Innovative countries thrive in the modern global economy. A focus on risk-taking, entrepreneurship, and invention has helped Germany stand out as the most resilient economy in Europe. Further, it has helped the United States sustain its lead on the world stage. Economists have measured a 2.2% gain in GDP growth rates for every 1% increase in research and development (R&D) expenditure in a country.  In other words, the only way to grow a developed economy is to keep innovating and inventing. Encouraging innovation should be the cornerstone of every new economic policy in the developed world.




The Changing Nature of Innovation Funding

The UK government’s efforts to encourage innovation have changed over the past few decades. Meanwhile, companies have been inspired by tech giants and successful startups from across the pond to invest in new techniques and cutting-edge technologies. British businesses of all sizes now realize the importance of securing intellectual property, applying for patents, hiring researchers, and encouraging the development of new techniques.

In the modern economy, a technical breakthrough or a unique technique is invaluable.

Businesses tinker with ways to transform their operations and gain a competitive advantage. Meanwhile, the government is on a mission to encourage and support these efforts. The most important element of this mission is the government’s R&D Tax Credits scheme. This was launched in 2001 and has been expanded regularly since then. These tax credits offer businesses of all sizes from different industries incentives to boost research and development investments.

The scheme has been a resounding success. Since 2001, every pound of tax credits has encouraged between £1.53 and £2.35 in R&D investments. More than 28,500 small and medium-sized businesses have benefited from the scheme. The government has spent over £9.5 billion over the years trying to boost innovation.

Platforms like Tax Cloud help businesses apply for these credits. However, many are still unaware of the benefits and structure of this incentive scheme. Thousands of entrepreneurs lack the support they need to invest for the future and to secure their operations.

As international competition intensifies and Britain leaves the European Union, the structure of these tax credits is changing.



A Shift in Innovation Funding

In order to stay competitive, the UK government is updating many of these initiatives focused on innovation and research. In the next few years, the government will establish the UK Research and Innovation (UKRI) and the Office for Students (OfS), while modifying the Research Excellence Framework.

Meanwhile, Innovate UK continues to support and fund new startups in the four key areas of growth for the British economy. These are technology, healthcare, infrastructure, and manufacturing or materials sciences. This year the agency will invest over £19 million in the most promising startups from these fields.

In the recent Autumn Budget, the government announced an increase in the rate of R&D tax credits, from 11% to 12%. Although this may seem like a modest increase, it is actually the largest boost to the R&D tax credit scheme in over 40 years. The government is adding £2.3 billion to R&D tax credit program from the National Productivity Investment Fund (NPIF), expanding the scheme further. The government has also taken steps to simplify the process of applying for these tax credits. Small and medium-sized businesses, who make up the bulk of tax credit applications in recent years, now have the facility of Advanced Assurance. This helps them manage their cash flows better with quicker tax credit deployments.


Final Thoughts

British businesses now have access to a broader incentive program that supports investments in research and development. Businesses of all sizes can have a genuine effect on the local economy while securing their competitive advantage by leveraging these schemes. Innovation funding helps lower costs of research and development. It also boosts profits and sustainable margins for the long term. With incentives and government-sponsored funds, business leaders can make long-term decisions on moving their enterprise forward. This should have a real effect on economic growth and living standards across Britain.