With Brexit talks in deadlock and the UK economy performing poorly, all eyes will be turning to Phillip Hammond to deliver an inspiring Autumn Budget on Wednesday to get things back on track.
No one can dispute the Chancellor has been dealt a tricky hand. The need to tackle the deficit through austerity measures whilst trying to stimulate a flailing economy seems like an impossible task. One area of focus is bound to be technology.
What do we know so far?
The Government has repeatedly stated its determination to keep the UK at the forefront of technological and digital innovation. This year alone we’ve seen the launch of the Digital Strategy in March and the new Digital Economy Council in July, both with the fundamental aim of boosting innovation and ensuring the UK remains the most attractive place to start and run a technology business.
Rumours emerged over the weekend that the Chancellor plans to announce a flurry of investments into technology. The Chancellor is alleged to be planning investments of £75 million in AI, £400 million for electric vehicle charging points and £160 million for 5G technology. This is all encouraging news, but if the UK wants to bolster its reputation as a global leader in tech, more support will be needed for the sector. Fierce international competition could easily see the UK fall behind.
This new wave of funding will have been forced, at least in part, by the loss of EU funding. This October, the European Commission’s website made it clear that UK applicants will no longer be given access to funding from Horizon 2020 once the UK leaves the EU. And importantly, funding will be pulled from current projects across the UK.
The knock-on effects of this are severe. Horizon 2020 is crucial to a huge number of scientific and technology based research projects in the UK so the Chancellor has had to pull together the funding to replace that which we will no longer receive from the EU. Now’s the time for the Government to prove there’s bite behind its bark. It needs to take control of its own initiatives, create industry-specific incentives and clarify what post-Brexit funding will look like.
What else could be done?
Government plans to invest in infrastructure such as 5G and fibre optic networks are a positive first step. Rolling out a comprehensive plan to get the UK’s digital network up to the best possible standards will be met positively by businesses across all sectors. On top of this, providing specialised support for tech and telecom companies will help keep the digital momentum flowing and make our cities into globally accredited smart cities.
Recently, the Government has heralded R&D as one of the key drivers to incentivise businesses to become more innovative. The trouble is that though it shouts loudly about the benefits of R&D, behind the scenes it isn’t being so supportive.
In fact, at present, a large portion of R&D tax claims from tech sector companies are being met with increased scrutiny and resistance from HMRC. HMRC has disputed £425m in R&D credits over the last year, up from £90m in the previous 12 months. It appears that approximately one in every five R&D tax claims in this sector is currently under inquiry when, historically, technology-related innovation claims have been approved without issue. The Government cannot continue to act in a Jekyll and Hyde manner. Without the right R&D funding mechanisms and processes in place, companies have less incentive to innovate in the UK. And without innovation, the Digital Strategy and associated programmes are doomed to fail.
If we want to support technology businesses and have the UK lead the way when it comes to digital, then we have to break the mould and rewrite our legislation. Today’s R&D tax legislation is based on thinking from a bygone era. Drawn up in the 1960s, it was focused on academia and blue-sky science; or geared towards pharmaceutical firms innovating with new drugs and delivery systems. When it was introduced, innovation was restricted to white coats in university labs. But that’s no longer the case. HMRC needs to evolve at the same pace as the businesses it deals with.
Globally, the UK has a low level of R&D spending as percentage of GDP. Data from OECD shows UK R&D as a percentage of GDP sitting at 1.7% in 2015, lagging behind countries such as Germany (2.9%), Japan (3.3%) and the US (2.8%). This must change to support what the Government itself has advocated: R&D spend to be 3% of GDP by 2020.
This issue was highlighted by Alibaba’s recent announcement that it will invest $15bn over three years in a global research programme. The UK is not one of the locations they have chosen. With Brexit on the horizon, we need to do more to incentivise big tech companies to come to, or stay in, the UK and invest in R&D.
By Justin Arnesen, Director: R&D Tax and Grants