Want to know more?

Levelling Up R&D tax relief

By Adam Bointon PhD, Technical Director at randd uk

Author: Tom Mason

Since 2019, Levelling Up has been a key priority for the current Government and has seen the introduction of many policies and rounds of investment aimed at reducing the UK’s famous north-south divide.

The more obvious areas for this split are the differences in productivity and funding within businesses, with the South East and London continuing to see higher rates of both than other parts of the UK.

This issue has come to light once again as the UK approaches a general election, this time with a particular focus on research and development (R&D) funding and support.

At her recent Mais Lecture the Shadow Chancellor, Rachel Reeves, sought to tackle the “collapse in our productivity growth” by exploring how R&D funding could be better spread to different regions of the UK, particularly in relation to university-led projects in industry.

Ms Reeves made it clear that Labour’s commitment to switch to 10-year R&D budgets would provide the clarity needed for “meaningful partnerships with industry”.

A step in the right direction

Without getting too involved in the politics of this proposition, it is good to see that Labour will not be reducing the R&D budget going forward if elected, as it is important to recognise that R&D investment is critical to economic growth.

As a Derby-based company, we have seen the effect of how R&D can transform businesses within the Midlands and northern regions, and it should be an integral part of the levelling-up agenda if any future Government wants to continue to take economic levelling up seriously.

Concentrating much of the R&D budget within the South East and London will only exacerbate the regional disparity problem further, as it will accelerate growth in these regions and leave others behind.

We frequently used to provide a service to our clients who had undertaken R&D with a local university through Knowledge Transfer Partnership (KTP) funding, but since the financial crash, this type of funding has largely disappeared.

The increased R&D budget in recent years has largely gone toward alternative sources, but utilising more of it through university partnerships with SMEs in the Midlands and the North would be a great way to not only advance technology but also attract skills and develop training programs that yield sustainable and productive jobs in these regions.

A policy shift to direct R&D funding to poorer regions through universities would be a good step in the right direction for all, including accountants who inevitably step in to support businesses with their R&D tax claims which we often support.

Addressing the current situation

The clear split in R&D funding and focus in the UK is most evident in the R&D tax statistics. The latest set of figures, published in September 2023 for the preceding tax year, shows a clear difference in claims between regions.

The data indicates that companies with registered offices in London account for 22 per cent of total claims and 32 per cent of the total amount claimed.

This is followed by firms in the South East, which make up 15 per cent of total claims and 18 per cent of the total amount claimed.

The East of England ranks third in terms of the amount claimed, representing 11 per cent of the total, though it is fourth in the number of claims. Conversely, the North West has the third highest number of claims, but the amount claimed is lower.

The distribution of claims and the amounts claimed by each region have remained consistent over several years, highlighting the historic concentration of R&D funding and activity in the UK.

Should any future Government wish to enhance productivity across the UK, focusing on R&D and innovation is essential.

It is clear that additional incentives are needed to distribute these activities more evenly across each region.

The importance of expertise

Not demonstrated in the funding or the official statistics is the spread of available R&D tax expertise in the UK.

This is much harder to accurately determine without further research. However, the propensity for Top 100 accountancy firms to have a local presence in London and the South East may suggest a greater capacity or availability of R&D tax expertise in these areas.

However, remote working via the cloud and access to outsourced R&D tax services, such as our own, largely reduce the impact of this issue in modern accounting.

Final thoughts

As we approach election season, it would be nice to think that all parties are willing to place R&D funding and tax relief at the forefront of their policies around levelling up the economy.

It is certainly an area where greater incentives could help to drive productivity and increase inward investment across all regions of the UK.

The nation has an incredible history of innovation, birthing some of the world’s most influential technologies, so it is important that R&D remains a priority and that the fruits of its labours are shared nationally.