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Innovation Nation: Rebuilding the U.K. Economy and the Importance of R&D

Nov. 4, 2020, 8:00 AM

We are still mired in the middle of the Covid-19 pandemic. Companies are still struggling for survival and many sectors are facing a deeply uncertain winter. Looking to the future at such a time may seem like a futile effort. But it is important that we do so, because if we are to “build back better,” it will require both short- and long-term planning, as well as a different way of thinking about and shaping our economy for the future.

The U.K. government has been able to provide “beyond wartime” support measures, especially for small- and medium-sized enterprises (SMEs), which have experienced a huge strain on their activities. Measures like the furlough scheme, Coronavirus Business Interruption Loans (CBILs) and Bounce Back Loans (BBLs) were introduced to help businesses manage short-term cash flow adequately and access funding quickly. On top of that, when the time came, schemes like Eat Out to Help Out were brought in to encourage the public to spend money in bars and restaurants and kickstart the hospitality sector.

But, for all the discussion around the success and suitability of some of the new schemes that were introduced, and with a second lockdown coming into force, it is important not to overlook the support mechanisms for businesses which already exist.

Ready-Made Solution

The R&D tax credits and patent box schemes encourage SMEs to innovate by offering tax rebates and reductions in corporation tax for all R&D activity. These schemes are a ready-made distribution channel through which the government can provide funding to SMEs whilst simultaneously encouraging innovation.

However, despite recent HMRC data showing the year-on-year increase in claims for R&D tax relief continued in 2019, overall business investment in innovation has only seen a marginal increase. We must not be lulled into a false sense of security—more R&D tax claims does not necessarily mean more innovation is happening (reaffirmed by the fact there was just an 8% increase in R&D expenditure identified). If we do not start seeing business spending on innovation rise in line with R&D claims, we risk the effectiveness of the scheme being called into question.

According to GovGrant’s research, over three-quarters of U.K. SMEs think innovation is important for recovery from Covid-19, and rightly so. If the economy is going to be rebuilt in a sustainable way, innovation must be at its heart so that the U.K. can attract foreign direct investment. Whatever the eventual outcome of the Brexit negotiations, our ability to strike attractive future trade deals also relies to a significant extent on our ability to create an open, modern, innovative post-Covid U.K. economy.

There is still a lack of awareness and understanding among businesses around the support schemes available. GovGrant’s Innovation Nation campaign recently revealed that, despite the R&D tax credits and patent box schemes, only 15% of businesses think the government is creating the economic environment in which innovation is encouraged. This is particularly concerning given that the R&D Roadmap—which sets out all the steps the government intends to take to encourage investment in R&D—was only launched recently. Even businesses which are aware of these schemes don’t always claim what they are eligible for: nearly a quarter (22%) of respondents have never claimed R&D tax credits despite being aware that they exist.

Confusion Around R&D

At the heart of these issues is a lack of understanding on what constitutes innovation. SMEs are not prioritizing claims for R&D or patent box because they struggle to see the innovation in their own day-to-day work—just 26% felt their current activities could be classed as highly innovative. However, the definition of innovation is not confined to ground-breaking inventions and miracle cures. Innovation can include the introduction of new or significantly improved products or processes, business structures and marketing concepts to name a few. Subject matter experts often cannot see the wood from the trees because they simply see their innovative activities as “just the day job”. These people urgently need more support when it comes to recognizing how innovative they truly are.

If we are going to plug the gap between the support that is available and the extent to which SMEs make use of it, part of this support means urgent clarification and a common definition of “innovation” that transcends sectors, geography and generations. GovGrant’s Innovation Nation campaign demonstrates the confusion around definition. Respondents were evenly split across three different definitions—42% of respondents said they viewed innovation as tiny and continual changes that happen daily, with the rest saying that it either happened rarely (but made a considerable impact) or only occurred sporadically. This disconnect may well be the reason that many SMEs are failing to claim valuable tax credits for their R&D. This is particularly true when it comes to intellectual property (IP).

Importance of Intellectual Property

The latest statistics released by HM Revenue & Customs (HMRC) show that patent box is even more underutilized than R&D. Whilst 5.3 billion pounds ($6.9 billion) was claimed in R&D tax credits in 2018–19, only 992 million pounds had been claimed under the patent box scheme. For a business, protecting its IP is important for maintaining its USP, but being too focused on protection is causing businesses to miss out on one of the primary purposes of IP: value creation. Businesses are just not leveraging their intellectual property as an asset. The vast majority (83%) of businesses see the importance of commercializing IP but less than a quarter think that this is the main point of a patent.

The common misconception is that IP and patents are only relevant to the largest inventors with the funds and the time to go through an arduous application process. As a result, one fifth of SMEs said they had no strategy in place to track their IP. This needs to change—most R&D activity will create some residual IP value. It needs to be driven by how they can improve margin, sell more and engage better with potential investors. Not only will that improve their own outlook, but it will contribute directly to how well the U.K. can recover and rebuild, drawing investment from outside. Improving the patent system will also make the U.K. more attractive for new businesses to base themselves here rather than in other countries, which will be vital post Covid-19.

Innovation has never been more important for creating a resilient and productive economy after the coronavirus crisis, especially with Brexit and the end of the transition period also fast approaching. We need to be taking IP much more seriously and start busting some of the myths around innovation if the government is going to improve awareness and accessibility of its support schemes, including the patent box. We urgently need to review the patent process and make it attractive on the global stage—and provide some clarity on what constitutes R&D activity if SMEs are to be encouraged to invest in it.

It is understandable for businesses to have taken a step back in order to focus on cashflow, and it’s natural that R&D slowed down as a result. But when we turn our attention to economic recovery, we must view the crisis as an opportunity to transform the economy. Innovation needs to be high on the agenda.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Luke Hamm is CEO of GovGrant, U.K.