Policy 12: Reform R&D Tax Credits so that they are fit for a modern digital economy
In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.
When it comes to R&D spend the UK is lagging behind its peers. According to the latest spending data, we only rank 11th in the EU and 19th in the OECD. Although the government has set a target of achieving 2.4 per cent of GDP for R&D investment by 2027, if R&D investment continues at the current rate of growth the UK would not reach this target until 2053... 26 years too late. If we are to meet the 2.4 percent of GDP target we must increase the amount of R&D work carried out by startups.
The UK’s tech sector is growing over one-and-a-half times faster than the rest of the economy, yet tech startups are currently being denied the right to R&D Tax Credit rebates for a range of technologies that are vital to their innovations.
Take data for example, the lifeblood of any tech startup. Since it isn’t classed as a ‘consumable’ in the R&D process, the cost of data sets can’t be claimed under R&D tax credits. Yet it’s integral to R&D projects of many tech startups, including AI and machine learning.
Another issue of major hindrance to tech startups and scaleups concerns cloud services. Startups rely exclusively on cloud providers to work with large datasets, train new algorithms and deploy sensors at scale when developing their products. However, more often than not, these costs are not accepted in tax credit applications. It is vital that startups have access to the computing power they need to build world-beating products and services.
Similarly, over 80% of startups undertake significant amounts of user interface (UI) and user experience (UX) research which they considered a vital part of their R&D processes. At the moment, startups are unable to claim fully for the costs they incur building innovative solutions to the front end of their product. Tech firms won’t market a product unless it’s been tested properly with users; they need a clear understanding from HMRC that UI/UX work is critical R&D work, and should be included in the credit.
We know that R&D is going to be critical for the future of the UK economy. We know that startups with limited capital need to invest early to be able to build world-beating products. And we know that the system needs to be updated. The next government must look at modernising this great scheme so that it is fit for the digital age.