R&D exodus for UK STEM amid ‘complexity and uncertainty’

The increasingly changeable and complex nature of Research & Development (R&D) tax credit legislation in the UK is driving science and technology businesses to move their innovation activity overseas, according to R&D consultancy ForrestBrown.

From April 1, businesses using the UK as a hub for collaborative international projects will no longer be able to claim relief on costs borne by UK companies for R&D conducted overseas.

New research from ForrestBrown has found that half (50%) of the UK’s STEM businesses expect to move some of their R&D activity abroad because of the upcoming changes.

The UK government also recently set out proposals for a single R&D programme that would replace the RDEC and SME schemes. If implemented, the new scheme is expected to be in place from April 2024.

A House of Lords committee report shortly followed, arguing that the proposed changes lack focus and would be ineffective in isolation.

“This drip feed of piecemeal changes adds complexity and uncertainty for businesses,” says David Byrne, director at ForrestBrown.

“In line with the recent report by the House of Lords Economic Affairs Committee, we advocate that these changes be paused and streamlined until the impact becomes clearer.”

End state for UK innovation

ForrestBrown’s research also shows that the main motivation for businesses relocating R&D activity abroad is a shortage of the specialist skills they need in the UK, with 42% stating that the availability of talent was the primary factor.

According to Byrne, the combination of a reduced R&D incentives scheme and a technical skills shortage “undermines the government’s ambition to establish the UK as a science and technology superpower”.

According to the ForrestBrown research, the science and technology businesses surveyed invest an average of nearly £1.1m in R&D activity each year.

Office for National Statistics figures also estimate that that expenditure on R&D performed by UK businesses in 2021 was £46.9bn.

Byrne argues that, based on this, the government should establish greater clarity in terms of its ambitions for innovation, and express this through a more appropriately paced implementation of changes.

“The government should identify a clear end-state for UK innovation and investment incentives with a phased rather than cliff-edge introduction of changes. This allows companies time to plan and adjust R&D budgets and resourcing strategies.”

Byrne also adds that this extra time may allow the government to refresh its approach to visas and bring more skilled resources onshore.

Advisers on high alert

According to Tarifa Simpson, an M&A adviser at Mazars specialising in pharmaceutical and life sciences, the forthcoming R&D changes could spark consideration of potential consolidation options for STEM businesses.

“The changes planned from April will require many life sciences businesses to re-assess how they operate, and where their value lies,” she says.

“This may drive M&A activity in the sector, but certainly highlights the need to forecast ahead and model a number of potential commercial scenarios”.

Byrne encourages similar advisory vigilance in the face of the new rules. In lieu of the government changing course, “advisers should continue to alert their clients to the upcoming changes and the different dates they apply to”, he says.

He also urges market participants to continue vocalising their concerns to the government in order to safeguard UK innovation.

“It remains important that we continue to provide feedback to government, whether directly or through trade bodies to ensure the UK retains attractive innovation and investment incentives in a competitive international landscape.”