BERD statistics paint a positive picture for UK innovation

For several years, data published by the Office of National Statistics (ONS) has reinforced negative perceptions of R&D tax incentives. The annual Business Enterprise Research and Development (BERD) statistics historically highlighted a large gap between R&D expenditure reported in the survey and the (much higher) figure shown in HMRC’s data, underpinning claims for R&D tax relief.

Problems with R&D expenditure data

Since both figures could not be an accurate measure of business R&D expenditure, many assumed that the latter number was inflated by error and fraud. This was an understandable conclusion given growing anecdotal evidence of spurious R&D claims, which caught the attention of national media.

This created the mood music that has led to a raft of R&D tax policy decisions. Changes such as cutting rates of relief for SMEs, introducing more administration for companies wishing to make a claim and launching a volume compliance project have all come under the banner of tackling abuse in the system.

At ForrestBrown, we’re believers in the importance of good data to underpin policy decision-making. While we saw first hand the negative impact that abuse in the system was having on genuine innovation, we advised that the BERD figures should be treated with caution. At the time, no detailed analysis had been carried out to explain why the two datasets were so incompatible.

When the ONS belatedly reviewed its methodology in 2022, it discovered material flaws in the survey population. It retrospectively revised its figures, publishing an amount which more closely matched HMRC’s reporting for R&D tax relief. It then set about updating and improving its methodology to produce a more accurate picture of UK business R&D spend. Figures released in February 2024 continue to paint a more positive picture.

The ONS figure of £49.9 billion far exceeds previous estimates and is now much more closely aligned to HMRC’s annual data on R&D tax credits, which reported R&D expenditure of £44.1 billion in 2021/22. With recent reforms to R&D tax relief in part influenced by previous BERD data, this more accurate ONS data provides an opportunity to reflect on those reforms and how to ensure R&D tax relief continues to support the UK’s most innovative businesses.

R&D spend by sector according to BERD

As expected, the largest contributing sector for R&D spend was pharmaceuticals, accounting for 18% of total R&D performed by UK businesses. Software development is also a strong contributor (13%) reflecting the transformational impact that software technology is having across all industries.

With the merged R&D tax relief scheme confirmed and ONS data now providing a more accurate measure of the success of R&D tax policy, the UK should look to build back more generous rates of relief. This will help ensure we continue to compete globally as innovation leaders.