Historic Cornwall rocket launch ends in failure. What research and development insights can be drawn?

UK space mission fails after rocket “anomaly”.

The space sector is currently worth over £16.4 billion per year to the UK economy and employs 45,100 people. The attempt to launch the first satellite capable rocket from the UK is an important milestone.

It is clear that the Government has made the space industry an important UK focus. Government R&D funding cannot reasonably be so great that Britain is a world leader in every field of science or technology. It is smart to accept this fact and focus on being a leader in a smaller number of fields rather that to dilute the effort and be an “also ran” in many.

One of the debates being looked at right now is the definition of R&D and how it relates to funding.

Grants should be targeted on specific sectors that the Government considers important. It is not clear even in the Grant sector how effective this is or even if the focus should be on what is described as pure R&D, e.g. real ground breaking fundamental research, or if the focus should be on commercial R&D. A key UK weakness has often been described as a failure to convert academic R&D success into commercial success for the UK economy. Britain does not have a particularly unified or coherent approach to the awarding of Grants. With for example different Grant awarding giving Grants for fundamentally the same thing which can imply a lack of expertise in the areas involved. The award bodies need to be refocused with clear roles that prevent duplication of award area. The overlaps are clear if you look at the award bodies.

• Arts and Humanities Research Council
• Biotechnology and Biological Sciences Research Council
• Economic and Social Research Council
• Engineering and Physical Sciences Research Council
• Innovate UK
• Medical Research Council
• Natural Environment Research Council
• Science and Technology Facilities Council.

Logically a project might fall under the remit of a number of these bodies. For example this Innovate UK £30 million fund could be also reasonably be viewed as falling under the Biotechnology and Biological Sciences Research Council or Medical Research Council. It seems to be quite a bureaucratic structure will a lot of duplication and a lack of focus. A better focus on strategic areas of R&D could be achieved within the Grant award field. It should also be noted that some of the R&D areas where Grants are awarded are not covered by the tax definition R&D for example the Arts and Humanities Research Council, and Economic and Social Research Council are not funders of Science or Technology R&D as defined for R&D Tax Credits.

Unlike Grants R&D Tax Credits could be described as being focused on R&D activity as a whole rather than specific areas of R&D. Formula 1 teams were in the news recently as the Red Bull teams apparent failure to keep under an competition spending cap was in part due to the way they handled R&D credits (RDEC). It appears they argued the money from the tax credit was not additional spending, but a refund of prior spending, so could be used without counting towards the cap. But what is clear is that the R&D Tax schemes place no limit on the activity that can be claimed as R&D, it just needs to qualify as R&D for tax purposes, it can be R&D to create a fast F1 car while equally in can be R&D to create a much slower but also much more environmentally friendly and practical family electric car. What matters is the advance which in the F1 car would appear to focus on power, aerodynamics, and speed, and for the “Green” electric car around battery technology and other factors that impact efficiency in an environmental way. Under the R&D Tax schemes both can be R&D what matters is the advance/qualification. To use an extreme example an R&D claim could be made for both projects that sought to reduce addiction to nicotine and those that sought to make cigarettes more addictive (Although this might break other laws). The advance in overall knowledge or capability in a field of science or technology is all that matters and not particular sectors or economic impacts.

This can be viewed both positively and negatively. Unlike Grants if a company qualifies for R&D Tax Credits they get them and no competition is involved. With Grants a choice is perhaps made on some level to fund Space R&D but probably not faster F1 cars. The impact of F1 on the UK economy is harder to assess but it appears not dissimilar to the Space industry with around 41,000 employed in the UK motorsport valley (A swathe of the West Midlands and Oxfordshire viewed as worlds biggest motor racing hub). Tax credits are an entitlement that follows R&D activity as opposed to depending on less certain or clear applications, awards, and funding pots. One aspect of the success the UK has had in attracting F1 teams might be the R&D Tax breaks.

What would help both the space industry and all other R&D claimants is the halting of one proposed reform to the R&D Tax schemes and reform of one of the most difficult areas of the R&D Tax schemes the interaction with grant funding.

The Government is currently legislating to disallow overseas subcontractor and external worker expenditure from R&D claims. A lot of significant areas of R&D are internationally collaborative like both the Space Industry and F1 and this cut to the schemes will make it less attractive to head quarter this type of R&D in the UK. Although Virgin is viewed as a UK brand practically Virgin Orbit the plane used to launch the rocket is an American owned company. The R&D scheme should not be altered to make this international aspect harder.

Secondly, I have worked on a couple of R&D claims for SMEs involved in the space industry. One “awkward” area that hits them hard in terms of the ability to claim R&D Tax Credits is the interaction of Grant funding and R&D Tax Credits which are due to adherence to EU State Aid laws. One suggested Brexit dividend was our own laws, it appears absurd that R&D companies are forced to deal with and lose out because of EU State aid laws in a country no longer part of the EU.

On a final note. The SME R&D schemes have been under attack recently. The schemes are viewed as expensive. They are not if viewed with perspective. For the tax year 2020-2021 the provisional estimate of the cost of support was £6.6 billion (£4.2 billion for SMEs) for 89,300 (78,825 SME claims) companies. This spending has a multiplier effect that boosts the UK economy. I would contrast this with the £6.5 billion tax payer cost of bailing out one energy supplier Bulb. £100 million less than the entire R&D Tax budget was spent bailing out one company. I think I can see where reform is needed.

Chris Toms – Technical Director RandDTax