UK business R&D spending has only increased by 60% – or has it? | Daily News Byte

The UK Office for National Statistics (ONS) is the official custodian of the country’s data. Every day, thousands of people rely on the agency for news on the most reliable estimates on everything from trends in COVID-19 mortality rates to the health of mountain ecosystems.

But lately, the agency itself has been making news. Last week, it confirmed a major change to the way UK businesses assess how much they spend on research and development (R&D). Earlier, the ONS said businesses would spend £26.9 billion (US$32.4 billion) on R&D in 2020. But as of November 22, that figure is £43 billion – an increase of almost 60%. The change is not surprising: it was floated in September, and NatureNews team reported it in October. But confirmation that it would be part of the national statistics came quickly – perhaps too quickly.

Surprise! The UK is spending more on research than that

The change will see the United Kingdom jump in the World Bank’s 2020 table of R&D spending as a percentage of gross domestic product (GDP) – from 1.71% in 2019 to 2.4%. This is still lower than the 2020 figures for the United States (3.45%) and Germany (3.14%), but higher than France (2.35%) and on par with China. By happy coincidence, 2.4% exactly meets the target that the UK government has set for R&D spending. Thanks to the ONS’s revaluation, this has been achieved five years ahead of schedule.

Researchers have different opinions on operating. The Organization for Economic Co-operation and Development (OECD), the international organization that sets standards for R&D measurement, is reviewing the revised estimates.

In the world of R&D (especially in high-income countries), it is businesses, not academic institutions, that spend the most. The ONS’s previous figure of £26.9-billion for business R&D came from a survey of around 5,400 companies, which was taken to represent business R&D in general. The sample consists mostly of small and medium-sized enterprises (SMEs), but also includes the 400 biggest spenders, from pharmaceutical companies such as GSK to Barclays and aerospace and defense company Rolls-Royce. Between them, the ten companies that finance the most R&D in the country spend more than £15 billion a year.

An important reason the ONS made the change was the realization that its survey data (particularly for SMEs) was increasingly out of step with data from the UK’s tax agency, His Majesty’s Revenue and Customs (HMRC). After comparing its figures with the tax relief given to businesses by HMRC for R&D expenditure, the ONS recalculated total business R&D for 2020 at £43 billion.

There are good reasons for the two agencies to collaborate on their numbers. But there are also good reasons to be cautious about and acknowledge the limitations of benchmarking business R&D against tax data. Tax rebates for R&D expenditure are based on the idea that firms are more likely to innovate if they are encouraged to do so. The United Kingdom is an enthusiastic adopter: it pays 2.5 times the OECD average as a percentage of GDP. Since the introduction of the scheme, the number of SMEs claiming the rebate has increased from less than 2,000 in FY 2000-01 to nearly 86,000 in 2019-20.

This opens up the possibility of abuse. Known R&D tax fraud is increasing at an alarming rate. Fraud and errors amounted to £469 million in the 2020-21 financial year, up from £311 million in 2019-20. Earlier this year, HMRC temporarily suspended payments to the companies pending an investigation. And in October, the agency arrested 8 people who submitted more than 100 claims for the R&D tax credit. On 17 November, UK Finance Minister Jeremy Hunt took action citing fraud as a reason for reducing R&D tax benefits for SMEs.

Attack on the future of science: why UK researchers are striking

Given these concerns, the ONS could have taken more time before finalizing its decision. The agency consulted experts, but a broader and longer consultation would have allowed researchers and other data users to comment on the change. Innovation economists would argue that the extent to which firms are claiming the tax is doing additional R&D. Forensic accounting researchers can help benchmark the United Kingdom’s experience with R&D tax fraud against data from other countries. The ONS itself admits that the United Kingdom is ‘unusual’ because according to business surveys its R&D expenditure is less than tax receipts; It is the other way around in many countries. The OECD’s blessing on the agency’s changes would not have gone amiss either.

All these things. The argument for increasing R&D spending to 2.4% was based on the idea that the United Kingdom was an outlier among the world’s largest economies. The country performs well on science and innovation indicators such as publications, patents and workforce, but it is disappointing in funding. If the ONS now says the target has been met, it reduces the drive to push businesses to spend more on R&D, particularly in an environment where difficult spending decisions are made. That would be shortsighted at best.

The researchers were instrumental in establishing the first set of rules for R&D expenditure data, agreed at the historic OECD meeting in Frascati, Italy in 1963 (see the latest version of the Frascati Manual). Research is as important now as it was then. There is no need to rush for changes. More due diligence will only enhance the ONS’s reputation as a source of reliable data.