U.K. Manufacturing Sector R&D Spending Held Firm in Q1 Despite Pandemic Fallout

Manufacturing sector R&D investment outperformed UK industry as a whole in first quarter of the year

R&D spending in the manufacturing industry held firm in the first quarter of this year despite the disruption caused by the pandemic, analysis of the latest ONS data, by business tax relief consultancy Catax shows1.

The manufacturing sector invested £3.8bn in R&D between January and March this year, representing no change on Q1 2020.

This was only marginally down (0.3% or £10m) on Q4 2020 and only £16m short of the record high set in Q3 last year. The figures are not adjusted for inflation, however, with CPI running at 0.7% in the year to March 20212, so this will have a marginal impact.

Despite being flat on an annual basis, the manufacturing sector’s performance in the first quarter was better than UK industry as a whole. Total R&D spending by UK businesses dropped 3% annually to £9.7bn in Q1. UK GDP in Q1 2021 was down 1.6% on the previous quarter3.

The industry had proved resilient in 2020, spending £15.3bn on R&D last year, up from £14.6bn in 2019. The increase came despite widespread disruption caused by the Covid-19 pandemic, which had led to fears that levels of innovation could suffer.

The ONS published its Q1 2021 statistics for R&D spending yesterday (Wed). 

Many of the industry’s members will benefit from R&D tax credits on qualifying spending. This tax relief was introduced by the government in 2000 to incentivise innovation, and results in either a reduction in a limited company’s corporation tax bill or a cash lump sum. 

Many firms don’t realise the work they do qualifies as R&D, which is defined as any work that seeks to resolve a scientific or technological uncertainty, whether that’s a new process, product or service. Crucially, R&D work does not need to have been successful to qualify and claims can be made up to two years beyond the end of the tax year in which the work took place.

Mark Tighe, CEO of R&D tax relief consultancy Catax, comments:

“Inflation will have nibbled away at the level of R&D investment reported here, but CPI was still so low during this period that spending has remained broadly flat. 

“That’s not a bad performance given the economic backdrop provided by Covid-19 and all the associated disruption but growth could pick up speed as the country opens up more over the remainder of the year.”