Science and TechnologyWritten evidence submitted by BMT Group Ltd

Introduction

This submission is from BMT Group Ltd (BMT), a leading, independent, engineering, science & technology consultancy, which is a member of the Association of Independent Research and Technology Organisations (AIRTO). We are aware of AIRTO’s written submission to your inquiry, so we have chosen, therefore, to concentrate our individual response to the R&D Tax Credit system that exists in the UK and proposals thereto.

Background

BMT (formerly British Maritime Technology Ltd) was created by the privatisation and merger of the National Maritime Institute with the British Shipbuilding Research Association in 1985. The group has been on a journey of commercialisation itself, but retains a strong core activity in research and development, largely paid for by our customers.

The enhancements which were made by Government to support growth in innovation following consultation in 2005 have proved highly successful to companies such as BMT, and we understand that the R&D Tax Credit system represents the majority of the BIS annual budget in the area of innovation.

BMT is a beneficiary in the UK of the R&D Tax Credit system and the tax offset of our qualifying research and development activities is most welcome each year. In addition, we participate in the Research Framework Programmes funded by the European Commission.

Turning to the key questions posed, we would respond as follows:

1. What are the difficulties of funding the commercialisation of research and how can they be overcome?

1.1 Research covers many parts of the eventual development of a product or service and can, therefore, take a very long time from initial ideation through to concept and then through to proof of concept. The proving of a piece of technology, or service line, needs to meet various criteria and the tests within the UK Accounting Standards provide a helpful guide, namely:

(a)there needs to be a clearly defined piece of research being commercialised;

(b)the related expenditure is separately identifiable;

(c)the outcome of such a project has been assessed with reasonable certainty as to;

(i) its technical feasibility, and

(ii) its ultimate commercial viability considered in the light of factors such as likely market conditions (including competing products or services), public opinion, consumer and environmental legislation;

(d)the aggregate of the deferred development costs, any further development costs, and related production, selling and administration costs is reasonably expected to be exceeded by related future sales or other revenues; and

(e)adequate resources exist, or are reasonably expected to be available, to enable the project to be completed and to provide any consequential increases in working capital.

1.2 There are usually too many uncertainties surrounding the successful commercialisation of pure research because of its immaturity or the lack of proof of concept, which prevents attracting funding. Incentives are a good way to overcome some of the difficulties and these should target key stages in the development life cycle.

2. Are there any specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

2.1 BMT is involved in a number of industries and in applying science and engineering technological solutions for its clients. It majors in the maritime world, which will typically involve large capital items such as ships, offshore structures, coastline infrastructure, warships, subsea equipment and the like. In view of the significant sums involved, it is often difficult to procure funding of ideas and research, although joint industry collaboration is more common in certain industries, such as in the oil & gas industry.

Attached at Appendices I and II are examples in the following relevant markets:

Offshore renewable energy.

Maritime transport.

2.2 The common difficulties and common solutions across sectors are driven by the perceived risks and differing objectives from providers of finance to those pushing technological change. Application of best practice risk management will help the process.

3. What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

3.1 We have, in the past, known UK-based research to have been transferred outside the UK for commercialisation in the area of telecommunications. This involved a “linear modulation technology” and narrow bandwidth to exploit the available spectrum in the United States. The spectrum in the UK was congested and there was not a sufficient scale of market to exploit the technology in the UK.

3.2 A second example is in the construction industry of an innovative electrical heating and cooling system combined with metal or fabricated skirting boards and radiators. The conservative nature of the construction industry means that there is typically a ten to twenty year lead-in, until a product is accepted by the leading manufacturers. The product was taken up in Eastern Europe, where the industry was less resistant to change.

3.3 BMT’s concerns following the general financial crisis centre around a reducing level of risk- taking with banks now wanting unreasonable levels of comfort before lending money, in turn leading to the suppression rather than the exploitation of innovation and subsequent drive of commercialisation overseas.

4. What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

4.1 Organisational behaviour changes with stimuli such as the R&D Tax Credit, which will feature in any cost benefit analysis or investment appraisal. Often, whilst not a core element of research and commercialisation, the tax credit calculation will tip the scales in favour of a project and, as a result, makes all the difference. It is a significant factor in our investment appraisals.

4.2 We have seen recent examples of the innovation R&D Tax Credit stimulating new ideas and developing ideas further, such as our Turbine Access System for vessels (TAS system), the details of which are at Appendix I.1

5. What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

5.1 We welcome the significant improvement in the R&D Tax Credit being paid above the line, rather than being used as a corporation tax offset for large companies.

5.2 In respect of the R&D Tax Credits the impact is likely to be relatively small, but, to increase its impact, we propose modifying the percentage given in the following areas:

(a)increasing the level of inherent subsidy for large companies from 130% to 140% from April 2013 specifically in the Government’s strategic target areas—for example in renewable energy—for a period of, say, three years; and

(b)increasing capital allowances for the Government’s strategic target areas. In order to help the large investment necessary in these areas a better capital allowance regime would complement the R&D Tax Credits to assist commercialisation.

6. Should the UK seek to encourage more private equity investment (including venture capital and angel investment) into science and engineering sectors and if so, how can this be achieved?

6.1 The UK must encourage more private equity investment into science and engineering sectors. This can be done in two ways, by increasing the venturing reliefs that are currently available and by giving a two to three-year time frame for added incentives in order to stimulate capital release out of large savings seeking better returns. Secondly, there should be the equivalent of a science and engineering bank established by the Government to provide the necessary capital in this most important area of our economy, or perhaps give the management of research loan funding to a bank run on behalf of its key stakeholders and the community on a co-operative basis.

7. What other types of investment or support should the Government develop?

7.1 We recognise the limitations on the money the Government has to spend. We believe, in its attempt to bridge the valley of death, the Government could do more in its strategies for education, as well as its efforts in the commercialisation of research. However, the approach outlined in the Government’s “Innovation & Research Strategy for Growth” published in December 2011 is very sound and will help the UK to maintain its recognition as a leader in the field of innovation.

February 2012

1 Not printed. See www.bmt.org/?/51/40/2870 and
www.youtube.com/watch?v=LZC9QDqkk88

Prepared 11th March 2013