UK urged to modernise R&D tax relief as China races ahead

China's growing investment in research and development (R&D) has prompted discussion on whether global competition will shift from tariff disputes to a contest over R&D tax reliefs.

A report from the Information Technology and Innovation Foundation (ITIF) suggested that China may have already surpassed the United States in total R&D spending, a development that could change the way countries seek to attract technological investment.

China's strategy for R&D goes beyond aggregate spending and encompasses government coordination, with central and provincial incentives working together to attract companies. Significant investment is being channelled into emerging technologies, while direct tax relief measures are being used to draw international firms into dedicated R&D zones.

Nations such as France and Ireland have begun to respond to these developments. France's Crédit d'Impôt Recherche has been strengthened to make it one of the most generous in Europe. Ireland is updating its R&D tax incentive system to focus more on innovation outputs. Meanwhile, the United States has recently reinstated full expensing of research and development (R&D), following advocacy from technology and manufacturing associations.

Questions have arisen about the position the United Kingdom will take as the global environment shifts increasingly towards competition based on R&D tax policy.

"If the UK wants to remain competitive in a world where R&D tax relief policy shapes the global map of innovation, it must act urgently to: Simplify the system - Merge SME and RDEC schemes more effectively, remove administrative friction, and offer clear guidance. Reward IP-rich R&D - Incentivise the development and retention of IP in the UK with expanded patent box and AI-specific incentives."

"Signal long-term stability - Give multinationals confidence that UK R&D policy won't shift every Budget but will be part of a 10-year innovation strategy. Invest in compliance technology - Fund digital-first, AI-enhanced platforms to process and verify claims faster and more transparently." Dr Brian Williamson, Chief Strategy Director at Kreoh said. 

The UK's R&D tax relief arrangement has attracted innovation-linked investment for several years. However, recent changes have led to increased complexity and uncertainty, particularly affecting small and medium-sized enterprises as well as global companies when assessing future R&D investments.

Dr. Williamson highlighted the changes required for the UK to maintain its competitive position. He identified four priorities: simplifying the existing relief schemes by better merging the SME and RDEC provisions; introducing more substantial incentives for intellectual property retention and development, with an emphasis on patent box and artificial intelligence; providing long-term policy stability to offer clarity for multinational investors; and investing in the digital infrastructure for claim processing, using AI-driven compliance systems.

"This isn't a war of words or tariffs. It's a silent competition, where the country with the most attractive R&D environment doesn't shout the loudest - it simply gets picked more often," he added.

Williamson urged timely action, warning: "If the UK wants to win its share of the innovation future, it must not only defend its R&D system, but actively promote and modernise it. Otherwise, while we debate reform, other nations will quietly walk away with the very businesses we hope to build here."

Dr Williamson previously served as Chief Executive at Jumpstart and is now Chief Strategy Officer at Kreoh.