Seizing the opportunity for tech led growth in 2022
After a period of significant economic turbulence, the UK saw strong growth in 2021, with the economy growing by 7.5%, the largest increase since the Second World War. However, the strong economic rebound in 2021, has begun to slow. During Q4 2021 the economy grew only 1% and growth projections for 2022-2024 show the UK economy will enter a period of flat growth.
With increasing inflation resulting from supply chain distributions and a difficult energy market, this presents a challenge of how to inject greater economic dynamism that will allow the UK to break free of this slowdown and deliver on the Government’s important long-term goals of Net Zero, Global Britain and Levelling-up.
Doing so means accelerating tech-led growth. The tech sector is the UK’s modern economic success story, between 2010 and 2019 the sector’s contribution to the UK economy has grown by 26.5%, with the latest DCMS figures showing the digital sector added £150.6bn to the UK economy, 7.6% of total Gross Value Added (GVA). Tech-led growth involves leveraging this strong digital and tech sector to drive growth across the wider economy.
In our Q1 2022 Digital Economy Monitor techUK’s members showed their readiness to support the UK’s economic recovery with tech companies exhibiting strong business performance, increased investment plans, and a strong desire to expand their headcount in the UK. This is driven by growing demand across businesses for digital transformation.
Accelerating tech-led growth will require action to ensure that we not only drive investment into the UK tech sector, but that other sectors of our economy have the ability and resources to complete their digital transformation journeys. In 2022 the Government has an opportunity to deliver this with a focus on four key areas:
- Grasping the opportunities of post-Brexit Regulation, by setting up emerging tech taskforces, ensuring data access for cutting-edge research and development and getting the right balance on the Post Brexit regulation of the Digital Economy.
- Accelerate digital adoption and address skill shortages to boost growth, by expanding the coverage of the Help to Grow: Digital scheme, supporting SMEs to invest in digital reskilling through a Digital Skills Tax Credit and continuing to reform the Apprenticeship Levy.
- Increase support for R&D and Innovation, by getting the expansion of R&D tax credits right, supporting businesses to invest in productivity boosting capital and machinery through a permanent tax deduction for capital expenditure and ensuring the UK gets their first to deploy key emerging technologies across our economy.
- Establish the right incentives for businesses to invest and grow, by not penalising businesses and costumers via an Online Sales Tax, ensuring the UK delivers on its targets for digital infrastructure, and leveraging UK capital and financial assets to unleash the next wave of tech success stories.
Further details on techUK's suggestions can be found below. You can view the full results of techUK's latest Digital Economy Monitor Survey here.
Seizing the opportunity for tech led growth in 2022
Grasping the opportunities of post-Brexit Regulation:
The Government has set out a strong marker for the kind digital regulation it wants to deliver now that the UK has left EU through the Plan for Digital Regulation. Ensuring these principles to actively promote innovation, achieve forward looking and coherent outcomes and exploit opportunities and address challenges in the international arena are met will be fundamental to ensuring the UK grasps the opportunity to develop a world leading regulatory system that enables growth and innovation as well as taking on potential harms. The Government has an opportunity to deliver this with a focus on:
- Emerging tech Taskforces: The Government should establish a series of taskforces aimed at breaking down barriers and streamlining regulatory processes to development and deployment of key emerging technologies where the UK is a leader, such as quantum technologies, artificial intelligence, autonomous vehicles, non-silicon based semiconductors and augmented and virtual reality technologies.
- Ensuring data access for cutting-edge research and development: The Government has proposed many common-sense reforms to its data protection regime that will tackle these challenges and provide organisations more confidence when pursuing data-driven research projects. To ensure these benefits are captured as widely as possible, product development should be kept within scope of proposed reforms to the GDPR’s statutory definition of “scientific research,” and the Government’s proposed exhaustive list of legitimate interest reasons for processing data should support further processing where this will support research, service improvement and innovation. This will help build on UK businesses contribution to R&D, which amounted to £25bn or over two-thirds of all R&D funding in 2018.
- Getting the right balance on Post Brexit regulation for the Digital Economy: There are huge opportunities to be gained if the UK can strike the right balance between preventing harm, supporting innovation and not making intrusive selective choices in the market. To achieve this, we recommend Government to work closely with industry on the design of new legislation, and the key regulators will need to be effectively resourced and well-coordinated via the Digital Regulation Cooperation Forum (DRCF). Regulators will also need to be supported to employ expert staff and sequence new guidance and calls for evidence effectively so as not to overwhelm smaller and challenger firms as the significant amount of new regulation planned is enacted.
Accelerate digital adoption and address skill shortages to boost growth:
The digital sector alone employs 2.98 million people with a further 1.87 million people employed in tech roles right across the economy. Projections suggest the UK has the potential to create a further three million new technology jobs by 2025. These jobs are generally highly skilled and pay substantially more than the average UK salary, with an average annual income of £62,500. To support the sector fulfill its desire to create jobs in the UK, we recommend:
- Help SMEs to invest in digital reskilling through a Digital Skills Tax Credit: SMEs should be supported and incentivised to invest in the upskilling and retraining of their employees, a tax credit, similar to the R&D tax credit system will help SMEs network and pool resources to achieve economies of scale with regards to investment in training and to overcome some of the obstacles SMEs face to investing in their workforce.
- Continue the reform of the Apprenticeship Levy: Employers should be further encouraged to invest in skills to maximise the number of apprenticeships and the effectiveness of the levy. This should include increasing the percentage of unspent funds from levy-payers that can be transferred to smaller companies in their ecosystem and supply chain.
- Expand the coverage of Help to Grow: Digital: To make this programme the true driver of digital adoption and productivity growth that it aspires to be, the government should consider broadening the scope of the scheme in future waves to include new software solutions as well as bundles of software. It should also seek to provide additional buying journeys, including value added resellers, as well as broadening the eligibility criteria for SMEs with fewer than five employees.
Increase support for R&D and Innovation:
techUK members place a high value on innovation and consider conducting R&D activities a fundamental driver of their business models. In our Digital Economy Monitor survey Q1 2022, 76% of techUK members said that doing R&D in the UK is important or extremely important for their business. However, members highlighted several barriers that are hindering businesses from meeting their R&D objectives. To support the sector overcome these barriers we recommend:
- Support businesses to invest in productivity boosting capital and machinery: Recent estimates show that keeping a tax incentive like the Super Deduction in place may yield a £40 billion a year boost in investment. Retaining this kind of deduction will be vital to continue to boost growth. techUK supports wider industry proposals for extending the Super deduction or replacing it with a similar but permanent 100% tax deduction for capital expenditure.
- Getting the expansion of R&D tax credits right: techUK and members warmly welcomed the Chancellor announcement in the Autumn budget to expand the R&D tax credit system to include data and cloud costs, something which we have advocated for since 2017. The next step is making sure that HMT does not limit companies' claims on their ability to communicate, share and publish the data for quality assurance and transparency reasons and that storage costs of data can be claimable for R&D tax reliefs, as in some R&D projects 80% of the costs can be attributable to the storage of data. (*update techUK has welcomed the Government's annoucement that storage costs will be included within the scope of the R&D tax credit at the Spring Statement).
- Ensure the UK gets there first to deploy key emerging technologies across our economy: As the commercialisation of emerging technologies continues to disrupt and transform markets, the UK must make sure it leads the pack in technology deployment and uptake to fully reap the benefits that these new opportunities will bring.This is a difficult task and will need to be driven across Government and in partnership with industry. To help achieve this we suggest Government works with private sector stakeholders to set deployment and diffusion ambitions for cross sectoral technologies such as AI and Quantum. This work should seek to measure uptake building on research already done for AI technologies and aim to identify barriers to deployment and diffusion as well as measuring the success of interventions to increase uptake.
Establish the right incentives for businesses to invest and grow:
Helping businesses across the economy to achieve their investment and growth goals will be key to achieving tech-led growth. More than two thirds of techUK members who responded to our most recent Digital Economy Monitor Survey said they plan to invest more in the UK, driven by a demand for digitisation. The UK must therefore act to build the right incentives and infrastructure so that both existing tech and aspirate digital companies can meet their investment goals. To achieve this, we recommend:
- Leveraging UK capital and financial assets to unleash the next wave of tech success stories: techUK encourages the government to move forward with the DWP's proposal to remove performance fees from the charge cap for DC pension schemes. If implemented, it would give DC pension scheme trustees more leeway to focus on generating returns to their members rather aligning them with development objectives outlined in the UK Government's Plan for Growth and creating new investment opportunities in tech.
- Do not penalise business as they transition to digital through via online sales tax: We recommend the Government not to proceed with an online sales tax which, according to the Treasury's own analysis, would disproportionately impact struggling households. In response to these structural changes in consumer behaviour toward online shopping, techUK recent report proposes ways in which technology can play a major role in putting high streets back at the centre of local economies and communities.
- Ensure the UK delivers on its targets for digital infrastructure: Direct competitors are investing heavily in the development of digital infrastructure. The UK must take action to ensure its digital infrastructure is secure, resilient and future proof. To achieve this, Government should seek to deliver its targets of building a secure and resilient 5G network by increasing the funding by £250 million in developing the Telecoms Diversification Programme and complete the rollout of gigabit capable broadband across the UK.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.
