techUK – Written evidence (STS0047)

About techUK

techUK is a membership organisation launched in 2013 to champion the technology sector and prepare and empower the UK for what comes next, delivering a better future for people, society, the economy and the planet.

It is the UK’s leading technology membership organisation, with more than 850 members spread across the UK. We are a network that enables our members to learn from each other and grow in a way which contributes to the country both socially and economically.

By working collaboratively with government and others, we provide expert guidance and insight for our members and stakeholders about how to prepare for the future, anticipate change and realise the positive potential of technology in a fast-moving world.

Introduction

The Government’s Plan for Growth see’s innovation as one of the key pillars of growth for the post-COVID and post Brexit economy. To help steer this goal the Government has set a target of achieving 2.4% of GDP being invested in R&D by 2027. Increasing this from the 2018 level of 1.7% of GDP invested in R&D however will mean achieving the fastest increase in R&D spending in over 20 years.[1]

The share of private investment in R&D makes up a larger proportion of the UK’s total investment now than it did in 1985 and in 2018 accounted for 68% of all investment in R&D.[2] While we have seen welcome increases in public sector commitments to invest in R&D, ensuring private sector investment continues to rise will be vital to achieving the 2027 target.

techUK members are committed to supporting the Government deliver this target. According to our Digital Economy Monitor survey Q1 2022[3], 76% of techUK members said that conducting R&D activities in the UK is important or extremely important for their business. techUK members also account for a large proportion of business R&D investment in the UK, [4] and their investments have enormous potential to generate benefits that extend beyond these companies, resonating throughout the UK economy.

Respondents to techUK’s Digital Economy Monitor Q1 2022 highlighted several barriers to conducting R&D in the UK, including difficulties in finding relevant skills and talent in the UK, a lack of options for financing R&D activities, lack of government support such as R&D tax reliefs or subsidies, and the cost-effectiveness of performing R&D in foreign markets.

In responding to the Committee’s Call for evidence techUK sets out a number of recommendations we have made to the Government to encourage private-sector investment in research and development in the UK. Our recommendations come across four areas supporting increased business investment, an innovative approach to regulation, public procurement and supporting key technologies.

The evidence submitted below is supported by techUK publications over the past year, with links to these documents included at the bottom of this document.

techUK would also welcome the opportunity to provide oral evidence to the committee if this were helpful for the inquiry.

Supporting increased business investment

The UK has a 17% productivity gap with the US and 12% with Germany. Innovation is critical for increasing productivity and long-term economic growth, generating more and better-paid jobs, allowing companies to thrive, and improving the UK's competitiveness.

techUK members place a high value on innovation and consider conducting R&D activities a fundamental driver of their business models. In our Digital Economy Monitor survey Q1 2022, 76% of techUK members said that doing R&D in the UK is important or extremely important for their business. However, members highlighted several barriers that are hindering businesses from meeting their R&D objectives. Among these are difficulties in finding the relevant skills and talent in the UK, lack of options for financing R&D activities, and lack of government support such as R&D tax reliefs or R&D subsidies. Government could help address this by.

Supporting businesses to invest in productivity boosting capital and machinery: In 2021, the Chancellor acted to assist businesses in recovering from the COVID-19 pandemic by establishing a Super Deduction that allowed businesses to claim 130 percent capital allowances on qualifying plant and machinery investments, making the UK's capital allowance regime more internationally competitive and raising the net present value of our plant and machinery allowances from 30th to first in the OECD.

This allowance, that has benefit companies all over the UK, is projected to end in March 2023. However, recent estimates show that keeping a tax incentive like the Super Deduction in place may yield a £40 billion a year boost in investment. Retaining this kind of deduction will be vital to continue to boost long-term investment in physical assets within the UK for undertaking R&D. Therefore, techUK supports wider industry proposals for extending the Super deduction or replacing it with a similar but permanent 100% tax deduction for capital expenditure.

Getting the expansion of R&D tax credits right: techUK and members warmly welcomed the Chancellor announcement in the Autumn budget to expand the R&D tax credit system to include data and cloud costs, something which we have advocated for since 2017. This change means that companies will be able to utilise the UK’s R&D support system to cover data driven research, which will support improvements in research, product development and productivity in the UK.

Enabling businesses to invest more in R&D fundamentally means businesses seeing clear returns on investment in innovation. While this does not solely come from tax reliefs the UK’s R&D Tax Credit system is an important part of this and is seen by many techUK members as a key part of the value case when locating R&D activity in the UK.

As techUK has recommended, the next step is to ensure that the proposed reforms are implemented taking into account how companies conduct R&D in the modern world. This means making sure that HMT does not limit companies' claims on their ability to communicate, share and publish the data for quality assurance and transparency reasons (e.g. where the company share the data so customers can understand the provenance and diligence of the analytics that have been performed). As well as ensuring R&D tax credits can be accessed by SMEs for example by allowing larger companies to complete applications for SMEs in their supply chain on their behalf and HMRC providing more guidance for SMEs to claimed R&D tax credits, reducing reliance on external support for claims.

techUK has welcomed the constructive approach the Government has taken to reforming the R&D tax credit and particularly welcome the recent decision in the Spring Statement to include cloud storage to be claimable under the credit, as in some R&D projects 80% of the costs can be attributable to the storage of data.

Leveraging UK capital and financial assets to unleash the next wave of tech success stories: Members have identified the lack of available capital in the UK ecosystem as a barrier limiting tech companies' growth. Even though the sector saw a record amount of investment in 2021, with £29.4 billion raised by tech companies, there are still important gaps that need to be addressed. For example, domestic investment accounts for only 28 percent of UK venture capital funding and this is especially low when it is delivered by UK institutional investors such as DC pension schemes.

techUK encourages the government to move forward with the DWP's proposal to remove performance fees from the charge cap for DC pension schemes. If implemented, it would give DC pension scheme trustees more leeway to focus on generating returns to their members rather aligning them with development objectives outlined in the UK Government's Plan for Growth and creating new investment opportunities in tech.

This regulation change will be an essential step toward that goal; however, we need to go further with wider discussions with the financial sector, tech sector and the Treasury to instil a broader cultural shift that can create new market-based opportunities for investment in asset classes that support our tech sector. techUK is committed to working with our members, other key stakeholders and the Treasury to achieve this goal.

An innovative approach to regulation

The Government has set out a strong marker for the kind digital regulation it wants to deliver now that the UK has left EU through the Plan for Digital Regulation. Ensuring these principles to actively promote innovation, achieve forward looking and coherent outcomes and exploit opportunities and address challenges in the international arena are met will be fundamental to ensuring the UK grasps the opportunity to develop a world leading regulatory system that enables growth and innovation as well as taking on potential harms.

Emerging tech Taskforces: the UK is home to world leading science and research, however often we are slow to commercialise and deploy the very technologies that have their intellectual roots here. To help address this, we need the right regulatory frameworks to support development. The Government should establish a series of taskforces aimed at breaking down barriers and streamling regulatory processes to development and deployment of key emerging technologies where the UK is a leader, such as quantum technologies, artificial intelligence, autonomous vehicles, non-silicon based semiconductors and augmented and virtual reality technologies.

Modelled on the work of the Regulatory Horizon’s Council these taskforces should be a partnership between industry and Government that seek to identify and tackle regulatory approvals, certifications and economic and cultural barriers to the commercialisation and deployment of key emerging tech. Creating these taskforces should complement existing initiatives such as the Government’s AI and Innovation strategies as well as expanding existing innovation schemes with a proven history of success such as regulatory sandboxes, test beds and living labs.

Ensuring data access for cutting-edge research and development: Data is vital for modern R&D and innovation. The UK Government has recognised this and committed to expand the UK’s R&D Tax Credit to cover data and cloud costs. However, the current data protection regime can cause legal uncertainty for organisations, including SMEs when processing personal data for research and development purposes, with some choosing not to fully use data through a lack of clarity.

The Government has proposed many common-sense reforms to its data protection regime that will tackle these challenges and provide organisations more confidence when pursuing data-driven research projects. To ensure these benefits are captured as widely as possible, product development should be kept within scope of proposed reforms to the GDPR’s statutory definition of “scientific research,” and the Government’s proposed exhaustive list of legitimate interest reasons for processing data should support further processing where this will support research, service improvement and innovation. This will help build on UK businesses contribution to R&D, which amounted to £25bn or over two-thirds of all R&D funding in 2018.

Getting the right balance on Post Brexit regulation for the Digital Economy: Having left the EU, the UK is trying to chart its own approach to regulating the digital economy through a third way between the more laissez faire approach of the USA and a comparatively proscriptive approach from the EU. This approach aims to strike the right balance between identifying clear outcomes such as boosting competition in digital markets or making the UK the safest place to be online, while maintaining flexibility so that regulators are not overly proscriptive and can modify guidance as new technologies emerge. The UK’s approach will also see supplementary duties being set for regulators to consider the economic implications of intervention as well as having due regard for innovation.

When designed effectively, regulation can be an enabler of innovation. It can help create the conditions in which innovation thrives and can trial new products and services, for example by expanding the UK’s use of regulatory sandboxes for new business models and technologies. There are therefore huge opportunities to be gained if the UK can strike the right balance between preventing harm, supporting innovation and not making intrusive selective choices in the market.

However, to ensure we get this right, Government needs to work closely with industry on the design of new legislation, the key regulators will need to be effectively resourced and well-coordinated via the Digital Regulation Cooperation Forum (DRCF). Regulators will also need to be supported to employ expert staff and sequence new guidance and calls for evidence effectively so as not to overwhelm smaller and challenger firms as the significant amount of new regulation planned is enacted.

Getting the right regulatory framework for Artificial intelligence technologies: The UK is among the global leaders of AI, ranking highly in international comparisons of peer-reviewed publications and private investment.

AI technologies have the potential to drive economic growth, help improve many of the services we interact with daily and even contribute to solving some of the most complex social and environmental challenges facing the modern world.

Yet, a recent global poll found that the population of Great Britain are among the most sceptical of AI use, with only 35% saying they trust a company using AI as much as they trust a company which does not. 

One way to help secure greater public trust is by adopting a clear and transparent approach to AI governance, which facilitates informed engagement. In the National AI Strategy published last year, the government established that a governance regime which “supports scientists, researchers and entrepreneurs while ensuring consumer and citizen confidence in AI technologies” is fundamental to securing the UK’s ongoing position as a global AI superpower. The strategy also announced that the government is preparing a white paper that is expected to set out its chosen path for the UK’s future AI governance framework.

To support this work, techUK has set out what we believe must be key elements included in the forthcoming AI white paper if we are to a build proportionate, innovation-friendly and effective AI governance regime. We encourage the government to:

1. Take a risk-based approach; tier AI governance requirements by the estimated level of risk posed by a given AI model or application, informed by clear criteria and categories.
2. Consider the entire AI lifecycle; clarify at what stages, from AI planning and procurement to ongoing use, risks can reasonably be expected to be addressed.
3. Encourage and oversee the development of an effective AI assurance market; work with industry to develop consistent and transparent requirements catering to different levels of risks and AI lifecycle stages.
4. Acknowledge the role of existing regulation; ensure that any potential new regulation or governance mechanisms do not replicate or contradict existing regulation.

Public Procurement

The new UK Innovation Strategy sets out an aim to make the UK government a ‘leading customer for innovation’ through a reformed public procurement framework. This initiative was welcomed by techUK members who believe it will allow better use of taxpayers' money to achieve two major objectives: First, it would empower the public sector to find efficient, innovative, and modern solutions to their most pressing challenges; and second, as evidence suggests,[5] procurement can be an effective tool in stimulating the innovation ecosystem, providing smaller firms what they need to succeed in the market, fuelling the scale-up ecosystem and facilitating wider adoption of new tech services, all of which enables structural change, increasing productivity, and stimulating long-term economic growth.

In order to achieve this double success, the UK should seek to address the barriers limiting the adoption of an innovative approach to public spending. As set out in techUK response to the Government’s consultation on Transforming public procurement, this means building fewer and better procurement frameworks; incentivising pre-market engagement, in particular, for complex solutions or those requiring a high level of innovation; shifting the culture of public sector procurement, which means that new regulations should be accompanied by training and capability uplift; and addressing customers’ current risk aversion to fully embracing tech SMEs and start-up innovative solutions

Supporting key technologies

As the commercialisation of emerging technologies continues to disrupt and transform markets, the UK must make sure it leads the pack in technology deployment and uptake to fully reap the benefits that these new opportunities will bring. Estimates show that technologies like Quantum could create new global market opportunities amounting $450 billion- $850 billion in the next 15 to 30 years, and Artificial Intelligence could deliver a 22% boost to the UK economy by 2030, mostly through AI-driven productivity growth, with significant gains across all UK regions.

Ensure the UK gets there first to deploy key emerging technologies across our economy: The UK needs to support the deployment and diffusion of these emerging technologies that could have strong cross economy benefits to rival other leading nations. This will require a holistic approach with a focus on getting the right skills and workforce, creating a favourable environment to export and import needed capabilities and supporting the convergence of different technologies and business models to unlock the next wave of innovative companies.

This is a difficult task and will need to be driven across Government and in partnership with industry. To help achieve this we suggest Government works with private sector stakeholders to set deployment and diffusion ambitions for cross sectoral technologies such as AI and Quantum. This work should seek to measure uptake building on research already done for AI technologies and aim to identify barriers to deployment and diffusion as well as measuring the success of interventions to increase uptake.

25 March 2022

Key references

techUK’s Digital Economy Monitor Q1 2022

techUK policy paper: seizing the opportunity for tech led growth in 2022

techUK position paper – Governance for an AI future

Regulating the Digital Economy after Brexit, what is the UK's approach?