2. Reform R&D tax credits by correcting eligibility and incentivising green innovation:

2. Reform R&D tax credits by correcting eligibility and incentivising green innovation:

To scale up business investment in design-led innovation for net zero.

Recommendation summary: HM Treasury expand tax credit eligibility by adopting the globally accepted definition of R&D within the OECD’s Frascati Manual.

To increase private sector investment in R&D, and to support innovation which drives sustainable behaviour change, tax reform for design’s contribution to R&D is needed. The definition of R&D and eligibility criteria within the UK’s current R&D tax credit system undermines design’s role in innovation and R&D for behaviour change.

Adopting the Franscati Manual within the UK’s R&D tax system would enable UK businesses to work on a level playing field with design innovators in Denmark, Germany, South Korea, France, and Italy. Incentivising design within R&D will benefit the UK’s design sector directly, supporting design businesses to innovate and strengthening the market for R&D design services, as well as improve the quality and market success of innovation activities in the wider economy.

Transitioning to a green economy will require all UK businesses to transform their business models, products, and supply chains. The current redesign of the UK R&D tax credit system is an opportunity to roll out a green R&D ‘uplift’, topping up the SME deduction rate by an extra 20% for activities which create positive climate impact.

Rationale and context

Design is a driver of profitability, innovation, and R&D within UK businesses. 42% of design workers carry out innovation-related activities such as R&D, compared to a 6% UK average. Across the wider economy, 1 in 5 businesses say design is integral to their innovation process. Design-active businesses are more likely to be market innovators, anticipate growth, and have a long-term net zero strategy.

UK R&D tax credits are valued by the UK’s design economy. Design businesses – 92% of which employ under 10 people –are R&D intensive. However, in current R&D tax credit guidance, design’s role is fragmented and under supported. ‘Design’ as defined within current guidance represents the relatively narrow field of design engineering, and leaves out industrial, service, packaging, and UX design vital to business innovation.

Many of the most important functions of design within R&D are undermined by the current guidance’s exclusion of social sciences. Without human-centred design innovative products often fails product market fit and don’t successfully support user and behaviour change, vital in the context of the climate crisis.

Supporting asks

Drop the exclusion of Arts, Humanities and Social Sciences (AHSS) projects from BEIS guidance, so that all design businesses are eligible.

Refresh the IP system so that it is easier and cheaper for designers to protect their innovations, together with creating licensing business models that enable designers to share green innovations around the world for others to build on.

Boost design exports by increasing international business development funding for design businesses, mirroring UK Global Screen Fund or MEGS.