28 Oct 2021

2021 Budget: Research and Development (R&D) & Innovation Highlights

Matt Symonds

2021 Budget Highlights for Research and Development (R&D)

In the 2021 Budget, the chancellor highlighted that Innovation and technological progress are central to driving long-term growth and improved living standards, as evidence shows that countries with higher Research and Development (R&D) activity tend to have higher productivity.

Science and innovation will continue to underpin solutions to many of the world’s greatest challenges, from economic recovery to climate change, health emergencies and national security. Every pound the government spends on R&D stimulates, on average, around £2 of private investment. Firms participating in UK Research and Innovation funded projects have been shown to grow employment and sales around 25% faster over six years than comparable firms.

The UK starts from a position of strength, ranking fourth in the Global Innovation Index, is home to four of the top 20 universities globally, and has the second-most Nobel laureates of any nation. However, Gross Expenditure on R&D in the UK in 2019 was 1.8% of GDP, lower than other advanced economies and below the OECD average of 2.5%, a trend primarily driven by low business investment in R&D. To address this, the government is increasing public R&D investment to record levels, providing £20 billion across the UK by 2024-25, including funding for EU programmes, to cement the UK as a global science and technology superpower. This is an increase of around a quarter in real terms: the largest ever over an SR period.

Combining the government’s direct spending on R&D with the support for tax relief, total UK R&D support as a proportion of GDP is forecast to increase from 0.7% in 2018 to 1.1% in 2024-25. This is well above the latest OECD average of 0.7%. For Germany the figure is 0.9%, for France 1%, and for the US 0.7%.

The Budget and SR will support the UK’s world-leading research base, while also ensuring that businesses across the UK have access to the ideas, skills and finance they need to grow, driving increased productivity and leveraging in further private investment. This settlement will make significant progress towards the government’s ambition to increase R&D spending to £22 billion by 2026-27, and drive economy-wide R&D investment to 2.4% of GDP in 2027.

Grant Funding Highlights

  • An increase to core funding for the UK’s world-leading universities and research institutions of £1.1 billion per year more by 2024-25 compared to 2021-22.
  • Fund full association to Horizon Europe, enabling further collaboration with European partners. In the event that the UK is unable to associate to Horizon Europe, the funding allocated to Horizon association will go to UK government R&D programmes, including those to support new international partnerships.
  • Establish the new Advanced Research and Invention Agency (ARIA) with £800 million allocated by 2025-26 (including £50 million from 2021-22). ARIA will carry out high-risk, high-reward research to support ground-breaking discoveries across the UK
  • Support world-class R&D in the aerospace sector, co-investing with industry. The government is extending its long-term commitment to the aerospace sector, guaranteeing funding for the Aerospace Technology Institute (ATI) to 2031.
  • Support priorities agreed by the Prime Minister’s new National Science and Technology Council, such as Quantum Computing, Artificial Intelligence, Bioinformatics and Space technologies.
  • Provide funding for the UK to become the first country to launch a rocket into orbit from Europe in 2022, with the aim of becoming a leader in commercial small-satellite launch, as set out in the National Space Strategy.
  • Private businesses drive wealth and opportunities for people by translating cutting-edge research into new processes, goods and services. While the UK has some highly innovative companies, overall private sector innovation spending is relatively low: in 2018, business investment in R&D was 0.9% of GDP, compared with an OECD average of 1.5%.
  • The Budget and SR provides support to the UK’s most innovative firms, leveraging in private sector investment and driving high-tech innovation to boost productivity across the UK. This includes providing at least £2.5 billion for Innovate UK core funding, a 36% increase across the SR21 period, to help connect companies to the capital, skills and connections needed to innovate and grow. The government is also investing in innovative green technologies in areas such as transport decarbonisation and green energy.
  • SR21 will support ground-breaking, innovative research to establish the UK as a global life sciences superpower with £5bn for health-related research including social healthcare challenges, genomic research and cutting edge COVID-19 treatments.
  • DEFRA will play a key role in making the UK a scientific superpower, with £140 million over three years to scale-up the Natural Capital and Ecosystems Assessment and at least £75 million for research and innovation in support of net zero in partnership with industry across agriculture, soils and peat, waste, and land use.

R&D Tax Relief Highlights

  • The government is reforming R&D tax reliefs to support modern research methods by expanding qualifying expenditure to include data and cloud computing costs, to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and to target abuse and improve compliance.
  • To help businesses to access the funding they need to innovate and grow, in July the government launched the £375 million Future Fund: Breakthrough, to increase the supply of growth-stage venture capital to UK-based R&D intensive companies. This builds on the successes of the Future Fund, which contributed to 11% of all UK equity deals in 2020.
  • The current system subsidies R&D happening outside the UK. The chancellor said that is not fair, and inconsistent with what is happening in other countries. Therefore from April 2023 tax relief for businesses R&D spending will only apply to domestic activities.
  • HMRC will be taking steps to further improve the reliefs’ effectiveness by refocusing government support towards innovation in the UK, by targeting abuse and improving compliance.

Matt Symonds, Managing Director of TBAT Innovation says “From a UK research and development perspective, this would appear to be a very positive budget, that stimulates, supports and encourages further innovation in the UK, which is great to see. Following Brexit and given COVID, we were looking for commitment to drive innovation and encourage activity in the UK, and we hope the measures announced enable this. We now look forward to further detail and will obviously keep you posted accordingly”

Review the latest Grant Funding opportunities on our Grant Funding Finder, or use our R&D Tax Calculator for a ball-park figure on how much R&D Tax Relief you could receive from HMRC. Our expert consultants are available to discuss your project idea in detail and help you access the funding you need, simply get in touch.

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