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Budget: Cloud and data added to R&D tax credits, tech skills and digital boost for departments

Rishi Sunak announces plans to incentivise private sector investment in research and development, attract global talent and boost the UK’s skills base

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New changes to the UK’s research and development (R&D) tax relief scheme to include cloud computing and data costs were announced today as part of a number of measures relating to technology set out in the Autumn Budget and Spending Review (SR) for 2021.

Announcing the changes under the government’s ambition to make the UK “a science and technology superpower”, chancellor Rishi Sunak said the tax credits modernisation is aimed at stimulating greater private sector innovation and is part of a plan to make the country’s R&D reliefs “fit for purpose”.

Sunak said the UK has the second-highest spending on R&D tax relief in the OECD (Organisation for Economic Co-operation and Development), but “it’s not working as well”, as the national business investment in R&D is less than half the OECD average. The chancellor said a review of the reasons for that has been conducted and the issues identified related to the scope of the reliefs and an insufficient focus on domestic businesses.

“The reliefs need to reflect how businesses conduct research in the modern world,” said Sunak, announcing the expansion of the scope of reliefs to include cloud and data costs – something that “many companies have called for”.

Commenting on the changes, Julian David, chief executive of TechUK, said the extension of tax reliefs to cover cloud computing and data costs is something the trade organisation has been campaigning for “for some time”. He added that this is a government recognition of how companies operate currently and that smaller businesses that use cloud computing and data-driven technologies have increased their annual turnovers in excess of £250,000.

“The chancellor’s plan to reform the R&D tax credit system to allow businesses to better utilise data and cloud computing services is a major upgrade to the UK’s support for research and development, marking a major step toward boosting UK productivity,” said David.

Sunak also noted that another problem with the current relief system is that companies currently claim UK R&D tax relief of about £48bn, yet UK business investment is at £26bn. “We are subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom,” he said. “That’s unfair on British taxpayers.

“The current R&D tax relief arrangement puts us out of step with places like Australia, Canada, Hong Kong, Singapore, Switzerland and the US, which have all focused their R&D tax reliefs on domestic activity.”

The chancellor added that the UK government is planning to do the same and incentivise greater investment in the country from April 2023.

As part of his Budget announcements, Sunak said government yearly spending on R&D by the end of the current administration will reach £20bn, in addition to the cost of R&D tax reliefs.

This increase of 37% will meet costs such as the establishment of the new Advanced Research and Invention Agency with £800m by 2025-26, and a boost to late-stage innovation with an increase to the core budget for Innovate UK to £1bn, double the amount it received at the start of the current administration.

According to Sunak, total public investment in R&D is increasing from 0.7% of GDP in 2018 to 1.1% by the end of 2022. Making a comparison with other countries, he noted that the OECD average of investment is 0.7%.

More funding for entrepreneurship

Other announcements in the Budget included new eligibility criteria for the government’s new scale-up, high-potential individual and global business mobility visas, which are hoped to attract highly skilled people and support inward investment. “A third of our science Nobel Laureates have been immigrants,” said Sunak. “Half of our fastest-growing companies have a foreign-born founder. So, an economy built on innovation must be open and attractive to the best and brightest minds.”

In addition to plans to make the UK’s visa system “the most competitive in the world”, the government announced the launch of a new Global Talent Network, aimed at identifying, attracting and relocating the global talent in key science and tech sectors. The initiative will launch initially in the Bay Area and Boston in the US, and Bengaluru in India.

The 2021 Spending Review will continue to fund the UK-wide Help to Grow schemes, which aim to provide world-class management training and support for digital adoption to more than 100,000 small and medium-sized enterprises (SMEs). It also supports the Made Smarter adoption programme to boost productivity of manufacturing SMEs through the use of advanced digital tools.

Still on supporting entrepreneurs, the Autumn Budget included an additional commitment of £150m for regional angel investment as part of the government’s levelling-up agenda and aims “to make the UK the best place in the world to start, grow and invest in a business”.

The boost to the angel fund is welcome, but more could be done for startups, said Nayan Gala, co-founder of startup investment bank JPIN VCATS. “The UK’s startup ecosystem in the regions will be pleased to see the increased funding for angel investors in the areas outside of London as this is a key area that is often overlooked, especially in the early stages,” he said.

However, Gala noted that the community was expecting further support for this segment of the economy, given that tech startups create “an enormous amount of jobs and wealth for the UK Treasury, creating unicorns at a rate of roughly one a week”.

He added: “There is a huge community of international investors and businesses who want to help the UK grow, both in its businesses and economically. Therefore, a focus on the post-Brexit legislation needed to facilitate international cooperation and investment will be vital.”

The increased commitment to angel investment follows other initiatives led by the government around supporting tech startup growth, such as the launch in July 2021 of the £375m Future Fund: Breakthrough to boost growth-stage venture capital to UK-based R&D intensive companies.

Increase in skills investment

The Budget also included an announcement of an increase of £3.8bn in skills spending. This rise of 42% in budgets relating to education will cover initiatives such as the roll-out of Institutes of Technology, as well as a four-fold increase in places for skills bootcamps, focusing on areas such as artificial intelligence AI) and cyber security.

Commenting on the boost for skills bootcamps, Richard Petley, senior vice-president at Oracle UK, welcomed the announcements, noting that this is reflective of the current needs of the UK workforce.

“From ambition to action, Rishi Sunak’s vow to make Britain ‘the most exciting place on the planet’ is coming to fruition,” he said. “It’s clear that this investment in artificial intelligence is an investment into the future of UK workers.” Petley cited Oracle’s own research that suggests 77% of working adults in the UK see technology as core to building their future.

“Skills bootcamps will empower workers to identify skills they need to develop and guide their career development – helping to regain control of their lives and careers,” said Petley, adding that the task of building skills for the future is not just up to the government. “Businesses must also prioritise upskilling their workforce and unlocking the true potential of AI. After all, when employees thrive, businesses thrive too.”

The government also announced that it will double the available scholarships for AI and data science master’s conversion courses with a £23m investment for under-represented groups.

Departmental initiatives

Sunak announced budget increases across several central government departments. For instance, the Department for Digital, Culture, Media and Sport (DCMS) settlement provides a £600m increase in funding to £2.7bn in 2024-25, up 2.9% a year on average over the SR21 period.

This settlement confirms investment of £1.2bn from 2021-22 to 2024-25 towards the £5bn gigabit-capable broadband connectivity initiative Project Gigabit, as well as £180m over the next three years as part of the government’s £500m investment for the 4G mobile connectivity project Shared Rural Network.

Increased funding across central government is expected to advance technology-related projects, according to the announcements made in the Autumn Budget and Spending Review. At the Department for Health and Social Care, £2.1bn is allocated over the SR21 period for innovative use of digital technology by hospitals and other care organisations.

The DCMS funding for SR21 also includes £160m towards new industries, as well as addressing the risk of online harms. More than £110m has been allocated over the SR21 period for the government’s new online safety regime through the passage and implementation of the Online Safety Bill. About £50m of DCMS funding over the SR21 period will go towards doubling AI and data scholarships and funding the government’s agenda on data policy and digital identity.

At HM Revenue and Customs (HMRC), the settlement provides for a £900m cash increase to £5.2bn in 2024-25, with digitisation of tax being one of the core priorities. According to the SR, the settlement will support the extension of initiatives such as Making Tax Digital. A further £136m investment will be made over the SR21 period to deliver the Single Customer Record and Account, a project to centralise taxpayers’ affairs online.

This Spending Review will also see further investment to modernise HMRC’s IT systems, with £468m over the next three years, on top of the £98m allocated in 2021-22, to reduce the risk of system failures, enhance the department’s ability to tackle cyber attacks and support the continued digitisation and modernisation of the tax system. Some £277m will be provided to HMRC over the SR21 period to transform its IT services procurement services. This builds on the £135m allocated in the previous Spending Review.

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The HMRC settlement also provides £2.3bn for border systems across the SR21 period, through £838m over the three years to 2024-25 to complete the delivery of critical IT systems, including the new Customs Declaration Service. It also includes £107m in 2022 for the Trader Support Service, which helps traders to move goods into Northern Ireland.

Among the announcements of departmental budgetary increases for digital, the SR21 also confirmed plans to spend over £8bn over the Spending Review period for “a major catch-up programme” to help the NHS clear non-emergency care backlogs accumulated as a result of the pandemic. Some £5.9bn capital investment will be directed to the NHS to tackle the backlogs and cater for a 30% rise in elective procedures by 2024-25 and modernise digital technology.

An further £1.9bn resource funding was announced for England’s criminal justice system. This includes a £80m cash increase in resource funding for the Crown Prosecution Service (CPS) by 2024-25. This is expected to boost CPS investment in digital innovation and delivers annual increases to core funding for the Serious Fraud Office to tackle fraud, bribery and corruption.

At the Department for Work and Pensions (DWP), £2.6bn has been allocated over the SR21 period for “digital activity to support the delivery of benefits and transform how customers interact with the welfare system”. This initiative includes £310m new resource spending and £213m in new capital investment.

Other commitments outlined in the Spending Review included brownfield residential development investment and a £65m funding pledge to to improve the planning regime, through a new digital system which intends to ensure more certainty and better outcomes for the environment, growth and quality of design.

Commenting on the digitisation initiative, Hugh Gibbs, co-founder of map-based property and planning data provider SearchLand, said modernisation efforts are crucial to solving the UK’s housing crisis.

“What’s needed now, more than ever, is a seismic shift in our outdated and ineffective planning system, which continues to be a threat to housebuilders’ ability to deliver new homes,” said Gibbs.

“A £65m funding pledge to help digitise the planning system might seem like a positive step, but given the scale and complexity of the task, as well as this government’s track record with digitisation projects, is enough emphasis being placed on this issue, given its immense importance?”

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