Breaking the mould: Why a new approach to R&D is central to a successful digital strategy

The Government’s recently announced Digital Strategy prompted a collective sigh of relief across a technology community that had long awaited a concrete plan for the future. However, Justin Arnesen, Innovation Incentives Director at Ayming, argues that the strategy falls short when it comes to incentivising and encouraging R&D. Arnesen outlines here how the Government should revamp legislation to support a truly digital Britain.   

The Government’s Digital Strategy is an action plan to make the UK a world-leading digital nation.  From £17.3 million in funding to support the development of new robotics and Artificial Intelligence (AI) to a renewed focus on tackling digital inclusion – the Government has made a very public commitment to make the UK the number one destination to start and grow a digital business. 

With Brexit looming, now’s the time for the Government to really encourage technology businesses to invest in the UK and get behind its Digital Strategy. However, in its current state, the Digital Strategy is not set up for success. The Government has heralded R&D as one of the key drivers to incentivise businesses to become more innovative. The trouble is that though it shouts loudly about the benefits of R&D, behind the scenes it isn’t being so supportive. 

In fact, at present, a large portion of R&D tax claims from IT sector companies are being met with increased scrutiny and resistance from HMRC. It appears that approximately one in every five R&D tax claims in this sector is currently under inquiry when, historically, technology related innovation claims have, rightly, been approved without issue. Without the right R&D funding mechanisms and processes in place, companies have less incentive to innovate in the UK. And without innovation, the Digital Strategy is doomed to fail.

The Government cannot continue to act in a Jekyll and Hyde manner. It has publically announced the importance of R&D – now it needs to walk the walk, not just talk the talk. 

So, what can the Government do to refresh its approach to R&D incentives? 

If we want to support technology businesses and have the UK lead the way when it comes to digital, then we have to break the mould and rewrite our legislation. 

Today’s R&D tax legislation is based on thinking from a bygone era. It was focused on academia and blue sky science; or geared towards pharmaceutical firms innovating with new drugs and delivery systems. When it was introduced, innovation was restricted to university labs. But that’s no longer the case, research and development is now born from business with companies such as Amazon paving the way with innovative new technology like Alexa.

The current UK R&D legislation outlines that companies have to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. This is too restrictive, and potentially overlooks much of the innovation taking place in businesses across the country. 

Take, for example, a fintech company that recently developed an innovative system for assessing the value of over-the-counter derivatives in response to new regulatory requirements. It created brand new valuation methodologies and quantitative modelling. It was highly innovative and involved significant computational requirement. Yet, it’s under enquiry with HMRC as they don’t believe this innovative work qualifies as R&D for tax purposes. 

Companies that are overcoming complex and difficult challenges by pushing the boundaries with new methods and procedures are not being encouraged. Yet it’s exactly this kind of innovation that the UK should be promoting. It’s time for the Government to rip up the rule book and prioritise commercial R&D alongside more traditional scientific innovation. In order to do this, the Government needs an outcomes-focused strategy that is aligned with the aim of the digital strategy: to attract and retain leading digital companies. And to achieve this, the Government has to work hand-in-hand with business to outline exactly what should be included. Innovation isn’t always obvious – but in the technology sector, new processes and new products are being invented almost every day. The only way for the Government to understand this, and reflect it within its tax and incentives framework, is to involve the industry from the outset when drawing up its new legislation. 

Re-writing the current R&D legislation is of course not a simple job. However, it would make Britain would be the first nation to prioritise commercial R&D alongside more traditional scientific innovation. If the UK truly wants to compete, then it’s a job it will have to undertake. By doing so, the Government would incentivise start-ups in naturally innovative industries and also attract more digital companies from overseas. For the Government, this would mean a significant new stream of tax revenue. The Government wants to make Britain the best place to start and grow a digital business, but currently there is no stand-out reason to pick the UK above tech giants such as the U.S. and China.

Being seen as an innovative environment

Businesses want to expand their operations in countries that are recognised as, or perceived to be, innovative in nature. At present, the UK doesn’t make the top ten list for innovative countries. It doesn’t even break the top 15 according to the Bloomberg Innovation Index. The UK’s total R&D expenditure in 2015 represented 1.68 per cent of gross domestic product (GDP), which is significantly less than Germany which spends 2.875 per cent of its GDP. 

In fact in Europe alone, Germany, France, Austria, Belgium, Switzerland and Ireland are all doing better than the UK. That’s before you even start to look at the rest of the world.  Ultimately, with the two year Brexit countdown clock now ticking, it’s never been more important for the UK to compete head-on. By being the first to modernise its legislation, it changes the rules of the game. The UK enforces itself as a forward-thinking nation and becomes a more attractive place for innovative companies to do business. 

With an ambitious digital strategy supported by world-leading R&D legislation, Britain has a chance to not only catch-up with its global competitors, but to truly challenge them on the digital stage.   

Justin Arnesen is Innovation Incentives Director at Ayming
Image source: Shutterstock/Omelchenko