Business R&D investment is over £15bn a year – higher than we thought

Earlier this month, the Office for National Statistics (ONS) published a blog outlining changes to their methodology for estimating business Research & Development (R&D) spend in the UK. This might not usually cause a stir beyond a small group of economists. But it turns out that business R&D investment is over 50% higher than previously estimated, corresponding to around an additional £15bn a year, or a little under 1% of GDP. That’s a big change!

Find out what this might mean for UK innovation policy.

What’s changed?

In short, ONS have updated their approach to better account for SME investment in R&D. SMEs invest significantly in R&D, so this has led to large uplifts in estimates of total R&D expenditure.

This work was kicked off because there was a large difference in UK statistics between the official ONS estimates of business R&D spend according to the Business Enterprise Research and Development Survey (BERD), and HMRC’s figures on R&D spend used to claim R&D tax credits. There are several reasons why there might be a gap, for example: different timelines, the ONS estimate uses a calendar year, while HMRC use tax years; the definitions of R&D used are slightly different; overseas R&D can be included in HMRC claims but is excluded from BERD; and the sectoral coverage of BERD is limited. HMRC also assumes a level of fraud and error in R&D tax credit claims which the ONS does not.

However, the ONS has now confirmed that the majority of the difference appears to be caused by the sampling approach they used. The ONS approach had very limited coverage of SMEs, whereas SME claims have made up an increasing proportion of R&D tax credit claims in recent years. The improvement in ONS’s approach to better cover these businesses has led to significant increases in their estimates: for 2020 the esti