In the 2023 Spring Budget, the UK government set out an ambitious programme to boost the UK’s potential as an innovative nation. It designated 12 geographic areas with special tax and regulatory rules intended to drive economic growth and productivity by attracting investment.
Known as Investment Zones, these areas have been designed to create knowledge-intensive growth regions centred around at least one of the government’s five priority sectors: digital and tech, green industries, life sciences, advanced manufacturing, and creative studies. The aim is to develop eight Investment Zones in England and four elsewhere in the UK. South Yorkshire was named as the first UK Investment Zone, resulting in thousands of new advanced manufacturing jobs in places like Sheffield, Rotherham, Doncaster, and Barnsley.
The incentives offered to the Zones, including funding for R&D grants, could be helpful tools to encourage innovation and sector-based growth in previously under-performing areas of the country. More than seven out of 10 companies that we surveyed said they decide where to invest in innovation based on tax incentives and grant funding, so fostering a supportive environment for R&D through Investment Zones could be a powerful means to unlocking economic growth.
However, one of the dangers with ‘picking winners’ in this way is that investment in one region can sometimes come at the expense of other parts of the UK, with the potential for economic decisions to become politicised. For example, none of the proposed English locations are situated south of Birmingham despite our research, showing there is untapped potential to deliver economic gains across the UK.
To effectively unlock long-lasting economic growth, we need to ensure that powerful behavioural incentives like R&D tax relief continue to work in the interests of all innovative businesses across the UK, alongside geographically focused direct funding for Investment Zones.
The case of Scotland
According to ForrestBrown’s Investment Potential Index (IPI), Scotland has very high innovation potential and is already establishing innovative centres in both the energy transition and life sciences sectors where it is strongest. Despite this, R&D investment in the country still has some way to go before matching spending in the UK’s R&D hotspots, lagging behind regions such as South West England in terms of R&D tax credits claimed and number of businesses benefitting.
However, the IPI ranks Scotland’s worker capacity – which measures the size and quality of the workforce – at 50, putting it in line with some of the higher-ranking regions in the South of England, the index also evaluated.
The government clearly recognises this potential, announcing two Investment Zones in Scotland earlier this year: Glasgow and the North East of Scotland. Scotland’s high worker capacity score suggests it has the skills to support R&D intensive businesses who may be considering where to locate their R&D activity.For Scotland’s Investment Zones to flourish, the economic activity they kickstart must endure beyond the initial funding injection. This is where R&D tax relief, the Patent Box regime, capital allowances and tax incentives to encourage investment can provide ongoing financial benefits to innovative businesses.
Harnessing the wider innovation toolkit
The reality is that every region has its own strengths, as the IPI serves to illustrate. Investment Zones are a well-intentioned part of the UK’s growth plan, but to deliver sustainable growth in all parts of the UK we need to ensure that we’re incentivising innovation across the board, whether that is in established tech clusters or emerging hotspots.
Currently, the government is looking to simplify R&D tax relief and is consulting on the design of a single scheme that merges the existing incentives for SMEs and the relief targeted at large companies (the Research and Development Expenditure Credit, or RDEC). This is a positive opportunity to simplify the way we incentivise R&D through the tax incentive and support economic growth by encouraging business innovation.
While the fine print and timeline of the merged R&D tax relief model still need to be ironed out, it’s imperative that the government keeps its focus on getting this vital incentive right to ensure it delivers for innovative UK businesses wherever they are located – not just those concentrated in the 12 designated Investment Zones.
Jenny Tragner will be taking part in panel discussions on ‘Unlocking innovation across the UK’ hosted by Centre for Cities in partnership with ForrestBrown at the Conservative and Labour Party Conferences in October. More details here.
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