A significant majority of UK businesses believe that a Labour government would have a positive impact on innovation, according to new research from Ayming UK. The study, which surveyed over 600 leaders in business, finance, and innovation, reveals that 79% of respondents are optimistic about Labour’s potential influence on the UK’s innovation landscape. In contrast, fewer than 5% anticipate a negative impact.
The findings come at a critical time for UK innovation, which has faced several challenges in recent years. Despite successive governments prioritising research and development (R&D), the landscape has been undermined by complications stemming from Brexit and ongoing issues with the UK’s R&D tax credit scheme.
Innovation: A Priority for UK Firms
Innovation remains a top priority for UK businesses, second only to enhancing operational efficiency. However, the study highlights significant concerns about the current government’s handling of innovation funding. The UK’s departure from the EU led to a temporary loss of access to the Horizon programme, a key source of funding and collaboration for cutting-edge research. Although the UK has since rejoined the programme, confidence has been shaken.
In addition to the fallout from Brexit, the UK’s R&D tax credit scheme has been a source of frustration for many businesses. HM Revenue and Customs (HMRC) has adopted a stringent compliance approach in response to fraudulent claims, causing delays and deterring firms from applying for credits. According to Ayming’s research, 23% of businesses have experienced payment delays, and 25% have been discouraged from claiming due to recent interactions with HMRC.
Benjamin Craig, Associate Director of R&D Tax Credits at Ayming UK, emphasised the importance of government support for innovation: “This should serve as a wake-up 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?”
Confusion Surrounding R&D Tax Credit Reforms
The research also reveals widespread confusion among businesses regarding upcoming changes to the R&D tax credit scheme. As of April 2024, the government will merge the SME scheme with the Research and Development Expenditure Credit (RDEC) scheme, significantly reducing the rates of relief for SME claimants. The cash benefit for many companies will be nearly halved, with relief rates dropping from 130% to 86% and the payable credit rate for most SMEs decreasing from 14% to 10%.
Despite these significant changes, 58% of businesses are unaware of the reforms, while 22% are aware but uncertain about their impact. This lack of awareness raises concerns about the future effectiveness of the scheme. Craig warns of the risks: “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.”
Offshoring of R&D on the Rise
The challenges in the UK’s R&D landscape are leading to a growing trend of offshoring R&D activities. Ayming’s research shows that 79% of UK businesses plan to conduct R&D projects abroad in 2024, compared to just 57% that will do so domestically. Europe remains the most popular destination for UK R&D, with 57% of firms conducting activities there, followed by the USA (11%), Australia (9%), and Poland (8%).
Large companies, in particular, are more inclined to innovate abroad, with only 33% of large businesses conducting R&D in the UK, compared to 69% of SMEs. Mark Smith, Managing Partner at Ayming UK, expressed concern over this trend: “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.”
The Need for Homegrown STEM Talent
The research also highlights the need for homegrown STEM (Science, Technology, Engineering, and Mathematics) talent. While the government has introduced a “highly skilled” visa to attract overseas talent—used by 20% of companies for R&D recruitment—the long-term solution lies in nurturing domestic skills. Ayming’s findings indicate that 26% of businesses see the development of homegrown STEM talent as critical to improving the UK’s R&D landscape.
Njy Rios, Director of R&D Incentives at Ayming UK, stressed the importance of forward-thinking policies: “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.”
As the UK strives to enhance its position as a global leader in innovation, the upcoming years will be crucial. Whether Labour can seize the opportunity to reshape the UK’s innovation landscape remains to be seen, but businesses are clearly signalling that change is needed.
