Blow to ‘Science Superpower’ as more than two thirds of UK firms set up R&D activity abroad in 2022, with a noticeable transfer of activity to the European Union

 

The UK is experiencing a crisis where firms are moving R&D activity abroad, according to research from business performance consultancy, Ayming UK. 

The research – published in Ayming’s inaugural UK Innovation Barometer – reveals that 69 per cent of businesses have moved R&D activity abroad in the last year and 70 per cent are planning to move activity abroad in 2023. In total across 2022 and 2023, 74 per cent of UK businesses are moving activity abroad and at least 63 per cent of businesses have moved activity to EU countries.

The findings raise serious questions about the attractiveness of the UK for R&D. The US, Germany, and France are the most popular destinations for this offshoring, selected by 28 per cent, 27 per cent, and 13 per cent of businesses respectively. These are all major economic rivals to the UK who are all competing for a finite amount of international R&D activity.

Directly contradicting the UK Government’s ambitions, the life sciences sector has moved the most activity abroad, with 94 per cent of businesses having moved activity overseas in the last year. Over half of life sciences firms have moved activity to Germany.

 

Mark Smith, Partner – Innovation Incentives at Ayming UK, says, “Amidst domestic turbulence, the emphasis on innovation has remained a notable constant across several governments. But, if the goal is to become a ‘Science Superpower’, we need to compete with the likes of the US and Germany in attracting R&D activity. If we don’t, UK firms will continue to offshore R&D to where access to capital and talent is easiest, meaning other regions will outgrow the UK as an R&D hub.”

Among a range of factors, firms are most likely to have been drawn to other markets by private funding opportunities, followed by more favourable R&D tax credit schemes, and better access to talent.

 

The UK’s exclusion from the Horizon research programme will be having an impact here. In reaction to the UK’s position on Ireland, the EU took the decision to block UK research programmes from applying to Horizon projects, causing significant alarm among the UK’s scientific community.

 

Njy Rios, Director – R&D Incentives at Ayming UK, says, “Seeing as we were a key member of the programme, exclusion from Horizon will cause an inevitable transfer of activity from the UK to Europe. But the impact of this goes much deeper than losing out on funding. There are softer implications to the UK’s reputation as a research hub that will also increase the chances of businesses setting up activity on the continent instead.” However, the knock-on effects of HMRC’s clampdown on fraud is also contributing to the problem. Thirty-five per cent of businesses have seen payments of R&D tax credits delayed, 24 per cent of businesses have had to reduce their R&D budget, and 19 per cent of businesses have delayed activity.

Partly in reaction to the fraud, the chancellor also announced cuts to SME tax credits in November. But with tax credits being the second most popular reason for offshoring, the UK Government must tread carefully or risk further rises in offshoring among SMEs, who will be influenced by greater funding opportunities.

 

Smith says, “There are a number of strong factors that need to be looked at and acted on. We have an attractive environment, but it’s clear we have to go further. Above all, now is clearly not the time to be cutting back on R&D incentives, so I would urge the UK Government to strongly reconsider its cut to the SME scheme and find an alternative solution to its concerns around fraud.”

To retain activity and reverse any decline in the UK’s R&D status, businesses think it is most important to expand the scope of R&D tax credits, followed by digitising tax credit processes, and facilitating collaborations lost from the UK’s exclusion from the Horizon programme, which is seen as even more important than backing up Horizon funding.

However, the research also uncovers overwhelming support for a new funding mechanism to support green R&D. Eighty per cent of businesses are currently not investing in sustainable/green R&D projects. As such, there is significant support for a supercharged tax incentive for sustainable R&D activity. Ninety-five per cent say it is important to the future of the UK’s innovation, with half of total respondents saying it is very important.

 

Rios says,  “A specific incentive for environmental R&D projects could be a very powerful tool. At the moment, all R&D activity is viewed the same. But if the UK Government established definitions about what constitutes environmental R&D, and rewarded businesses through a super-charged tax credit, it could transform the UK’s green innovation. It’s a way of directly funding green innovation that would be much more effective than grants. No other country does this and it would be two birds with one stone, providing a boost both to the UK ‘Science Superpower’ and Net Zero ambitions.”