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Home COUNTRY DACH

UK’s Research & Development Tax Budget Stagnates Over a Decade, Growing by Just 14% Between 2007 and the Most Recent Data

ffnewsby ffnews
October 28, 2024
Reading Time: 6 mins read
in DACH, FRANCE, PRIVATE DEBT, UK&IRELAND
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Financial consultancy specialising in Research & Development (R&D) tax relief, RCK Partners, and the London Business School, have published a Comparative review of the UK’s R&D Tax Relief scheme relative to Other OECD countries. The report reveals that compared to other OECD countries, the UK’s R&D tax budget has only increased by 14% between 2007 and 2021 (the most recently available data), whilst Japan, South Korea and Germany have continued to boost budgets for innovation.

Over the same time period, Japan increased its R&D tax budget by 134%, South Korea by 119%, and Germany by 71%. To put this in context, Germany increased budgets by over five times that of the UK. 

The report critically examines the UK’s recent R&D tax reforms, focusing on the 2024 merger of the Research and Development Expenditure Credit (RDEC) and the Small and Medium-sized Enterprises (SME) schemes. With comparisons to nations like Germany, South Korea, and France, it underscores the urgency of implementing a more competitive R&D tax framework to keep pace with global leaders.

The UK’s R&D tax scheme: A missed opportunity? 

The UK’s R&D tax credit system has seen substantial changes in the last two years. The merged scheme launched in April 2024 now offers a flat 20% taxable credit on qualifying R&D expenditures for all companies. While this simplifies the process, many SMEs that once enjoyed more favourable conditions face diminished benefits unless they meet the “R&D intensive” threshold. These reforms could alter the innovation landscape, particularly for smaller businesses that drive a large share of R&D claims.

Lord Philip Hammond, Ex-Chancellor of the Exchequer and Senior Adviser at RCK Partners comments:

“The UK’s shift to a unified R&D tax credit scheme could severely impact SME competitiveness and innovation. With 88% of R&D claims historically coming from SMEs, the move to a flat 20% credit risks stripping smaller firms of a crucial tax advantage. This reduction in support may discourage innovation, leaving the UK trailing behind countries like Germany and South Korea, which continue to prioritise robust R&D incentives for SMEs. Without targeted relief, the very businesses driving the bulk of R&D activity could face an uphill battle in fuelling future economic growth.”

OECD innovation landscape

The UK’s R&D challenges are compounded by low private-sector investment in innovation. While countries like South Korea and the US invest 3.8% and 2.6% of their GDP in business R&D, the UK trails at 1.99%. Even with a total R&D expenditure (GERD) of 2.9% of GDP, the UK lags behind nations like Germany (3.13%), Sweden (3.41%), and South Korea (5.21%). This underinvestment puts the UK at a disadvantage, particularly as other nations ramp up their R&D efforts amidst tightening fiscal conditions.

While the UK has relied heavily on tax incentives—providing 4.1 times more tax relief than direct government R&D investment in 2021—the effectiveness of this system is lagging. According to the Implied Marginal R&D Tax Subsidy Rate, countries like Iceland, France, and Portugal offer more generous tax benefits to both profitable and loss-making SMEs. This highlights the structural inefficiencies within the UK’s system, particularly for smaller businesses that drive a significant portion of the country’s innovation. 

Martin Veselinov, Student at London Business School said:

“According to the UK Innovation Report 2024 report, the UK is a global leader in research output, ranking just behind China and the US in total academic publications. To maintain the UK’s position as a global leader in innovation, the government must revisit its R&D tax relief system, focusing on bolstering support for R&D-intensive SMEs. By introducing targeted incentives for these firms, the UK can help bridge the gap in private-sector investment and foster the commercialisation of groundbreaking research. Additionally, aligning R&D tax incentives with a long-term industrial strategy in high-growth sectors such as AI, biotech, and cleantech will stimulate private investment and strengthen the UK’s global competitiveness in emerging industries.”

Read the orginal article: https://ffnews.com/newsarticle/funding/uks-research-development-tax-budget-stagnates-over-a-decade-growing-by-just-14-between-2007-and-the-most-recent-data/

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