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Joel Gladwin

Head of policy at the Coalition for a Digital Economy

The next government must reform the R&D tax credit if UK tech is to thrive

When it comes to research and development spend, the UK is seriously lagging behind. The government has set a target of achieving 2.4 per cent of GDP for R&D investment by 2027, but if it continues at its current rate of growth the UK will not reach this target until 2053, 26 years too late. As my colleague Dom Hallas wrote a few months ago, we can only improve this situation by increasing the amount of R&D work carried out by tech startups.

The UK’s tech sector is growing over one-and-a-half times faster than the rest of the economy, yet tech startups are currently being denied the right to R&D Tax Credit rebates for a range of technologies that are vital to their innovations because of an outdated definition of what constitutes R&D. This is precisely why we have teamed up with The Entrepreneurs Network (TEN) in our Startup Manifesto, to urge the next government to reform the R&D Tax Credit scheme so that it is fit for a modern digital economy.

It is nothing short of absurd that the definition of R&D still used by the government to assess tax credit applications is based on the outcomes of a meeting in Frascati in 1963 – a time that well predates the advent of both the personal computer and the internet.

Little wonder then that the current scheme doesn’t reflect the modern research processes of a tech company and it is well overdue a fundamental review if the UK is to lead the way in the fourth industrial revolution.

Data is now the unquestionable driving force behind the majority of today’s innovations, and it acts as the lifeblood for any tech startup. We are extremely fortunate to work everyday with founders of startups to see first hand the amazing products they are able to build utilising AI and machine learning technology. They can only do this by investing heavily in costly datasets, which is why it is unbelievable to find that these costs can’t be claimed under the R&D tax credit because they are not deemed to be a ‘consumable’. They are clearly integral to the R&D process.

But datasets alone cannot build world-beating products and services. Startups rely on cloud providers to provide them with the computing power they need to work with data, train new algorithms and deploy sensors at scale when developing their products. In our original research, 68 per cent of startups highlighted cloud storage as a key cost to their R&D processes. However, more often than not, these costs are not accepted in tax credit applications.

Similarly startups are unable to claim fully for the costs they incur building innovative solutions to the front end of their product. Over 80 per cent of respondents to our survey considered user interaction and user experience development work as core to product development as they wouldn’t market their product unless it had been tested properly with users. Startups need a clear understanding from HMRC that user interaction and user experience development is critical R&D work, and should be included in the credit.

Companies should be able to claim for all of these, which is why it is extremely promising to see that all the major parties are committed to finding new ways to boost R&D in their manifestos. The Liberal Democrats and Conservatives have taken an extra step by taking heed of our proposals, promising to allow companies to claim R&D tax credits against the cost of purchasing datasets and cloud computing.

Whoever is in Number 10 at Christmas must fundamentally review R&D support mechanisms to reflect the modern research processes of tech companies. If they fail to do so, startups will be prevented from leading the charge towards a high-growth, high-productivity, high-wage British economy.

Joel Gladwin is head of policy at the Coalition for a Digital Economy (COADEC)