A time for boldness: EU membership and UK science after the referendum Contents

Chapter 5: Potential opportunities offered by Brexit

95.The disadvantages of Brexit received much attention during the period immediately after the EU referendum. Deep concerns about Brexit remain but, more recently, they have been accompanied by speculation about potential benefits available to the UK outside the EU. In this Chapter we consider early evidence and suggestions of opportunities which Brexit may offer science in the UK in the areas of the Industrial Strategy and the possible reform of VAT rules for facilities shared by science and business. We received a small amount of evidence about the potential opportunity that may be offered by the reform of the state aid rules but we do not have a sufficiently wide evidence base to consider that issue in this report.

The Industrial Strategy

96.On 18 July, the Prime Minister announced the formation of the BEIS. This resulted from a merger of the functions of the Department of Business, Innovation and Skills (BIS) and the Department for Energy and Climate Change (DECC). The Rt Hon Greg Clarke MP was appointed Secretary of State for BEIS. In a speech at the Royal Society on 1 August, he stated that his ministerial team would work:

“… closely together to develop and put in practice our Industrial Strategy. When I met the Prime Minister it was clear that this was her personal vision. It’s an important moment when we have explicit recognition that the government should deliberately take a strategic approach to business and the economy”.88

97.Brexit is a major part of the context in which the Industrial Strategy is being developed. Early statements from ministers suggest that the Industrial Strategy will define much of the future relationship between the Government and business, within a wider policy framework for the economy and public spending.

98.In oral evidence Jo Johnson MP told us that the Government was in the process of gathering evidence for the Industrial Strategy from stakeholders. A discussion paper would be published around the time of the Autumn Statement, and “a more considered response from the Government [would be produced] in the new year of 2017”.89

99.He told us that an Industrial Strategy:

“… has to be about making sure we have the skills base, the capacity to absorb research and innovation; it has to be about having the hard and soft infrastructure … as well as the education and healthcare systems, and it has to be about science and innovation, so making sure … that we have a world-class research base that will keep us at the cutting edge of discovery for years to come … We also have to ensure that we are continuing to create a business environment that will be attractive to inward investment and that will enable us to have competitive companies creating jobs and opportunities”.90

100.In the Chancellor of the Exchequer’s Autumn Statement91 on 23 November, he confirmed an additional £2 billion per year by 2020 for R&D. This funding will be channelled through UKRI. He said the new Industrial Strategy Challenge Fund would be, “a new cross-disciplinary fund to support collaborations between business and the UK’s science base, which will set identifiable challenges for UK researchers to tackle”.92 The Prime Minister told the CBI that this fund would, “direct some of that investment to scientific research and the development of a number of priority technologies in particular, helping to address Britain’s historic weakness on commercialisation and turning our world-leading research into long-term success”.93 She also pledged to build on the work done to make “the Research and Development Credit more generous and easier to use” by looking at how to make this support even more effective with the aim of ensuring, “a tax system that is profoundly pro-innovation”.94

101.Professor Womersley explained the importance of the Industrial Strategy and the priorities it should have in the light of the EU referendum:

“It allows us to explain the role of science and innovation in underpinning future productivity growth in a knowledge-based economy. It allows us to talk about the skills, about basic technology and how to feed them through into economic activity, not just in a linear system but to feed back challenges. It enables us to make this connection between the work of the research councils, the work of universities, the work of Innovate [UK] and others and other PSREs [public sector research establishments] as well, in a way which obviously relates to government priorities and which might influence negotiation strategy around Brexit and even future funding.”95

102.Similarly, Professor Dame Julia Slingo, Chief Scientist at the Met Office, told us, “The formation of the department in which you bring together business, energy and Industrial Strategy alongside the research base is also a very good signal of our intent on where we as a country want to go … There are some real opportunities here which we have not had in the past that are very timely.”96

103.Jo Johnson MP told us that “the Government want to create a framework in which businesses can compete on level playing fields; they do not want necessarily to get into the world of persistent subsidies for individual companies or individual sectors”.97 We recognise that outside the EU, and possibly outside the single market and the state aids regime, the UK will wish to conform to wider international regulations over the relationship between the Government and business.

104.The development of an Industrial Strategy during the UK’s departure from the EU is a major opportunity for the Government to strengthen its support for UK science and increase its role in the economy. We welcome Jo Johnson MP’s expansive view of the scope of the Industrial Strategy and the alignment with the Industrial Strategy of the new funding announced by the Prime Minister on 21 November. We will follow the development of the Industrial Strategy with interest and may scrutinise it further in the short to medium term.

105.Within the framework of the Industrial Strategy and in view of this new funding, we hope that UKRI will be given the freedom to support projects on their merit, assessed by peer review. We also hope that UKRI will be free to use this funding to support international collaborations with partners in EU Member States and elsewhere if these provide the most attractive propositions.

106.Unless the negative effects of Brexit are mitigated, the UK will inevitably become a less attractive destination for talented people, research and development (R&D) investors and scientific partners. Fortunately, the Government has the power to mitigate many effects of Brexit and could use the Industrial Strategy and other interventions not only to compensate for Brexit, but to further increase the attractiveness of the UK as a place to pursue science careers and invest in R&D. This is a time for bold steps to prepare our country for life outside the constraints and opportunities of EU membership, but with a far more prominent place in the global economy.

107.In addition to the changes recommended in Chapters 2 and 3, the following mitigating changes could be made within the wider context of the Industrial Strategy:

108.We welcome the Prime Minister’s commitment to review current R&D tax incentives and the announcement of a review of the Small Business Research Initiative.

Reform of VAT rules for facilities shared by science and business

109.We heard evidence that exiting the EU provides the UK with an opportunity to promote research collaborations between academia and industry, and further attract inward investment. The extent to which charities and universities can currently partner with industry is limited by VAT rules on shared facilities, equipment and buildings. Cancer Research UK told us that “reform has not been possible because of EU membership”.98 CaSE told us, “Publicly-funded research institutes are restricted to 5% commercial activity if they opt not to pay VAT or face costly tax bills to co-locate their researchers with industry colleagues”.99 The Dowling Review100 recommended that this be looked at as a matter of urgency.

110.Mr Davies explained that VAT exemption rules were part of the package of choices and trade-offs faced by the Government and that “officials [were] working through this process with colleagues in the Department for International Trade and the Department for Exiting the European Union … spending our time now auditing the fact bases so that we can then make a clear assessment of the choices and trade-offs for Ministers”.101

111.The Government should take advantage of Brexit and review current rules on VAT exemption on sharing of buildings, equipment and facilities for the purposes of R&D, to support industry, academia and charity collaborations and attract further inward investment.

88 Rt Hon Greg Clark MP, Speech on new ministerial team to develop industrial strategy, 1 August 2016: https://www.gov.uk/government/speeches/new-ministerial-team-to-develop-industrial-strategy [accessed 14 November 2016]

89 Q 47 (Jo Johnson MP)

90 Q 47 (Jo Johnson MP)

91 HM Treasury, Autumn Statement 2016 (23 November 2016): https://www.gov.uk/government/publications/autumn-statement-2016-documents/autumn-statement-2016 [accessed 30 November 2016)

92 Ibid.

93 Prime Minister Theresa May, Speech at the CBI annual conference 2016, 21 November 2016: https://www.gov.uk/government/speeches/cbi-annual-conference-2016-prime-ministers-speech [accessed 7 December 2016]

94 Ibid.

95 Q 38 (Prof John Womersley)

96 Q 36 (Prof Dame Julia Slingo)

97 Q 53 (Jo Johnson MP)

98 Written evidence from Cancer Research UK (EUF0003)

99 Written evidence from the Campaign for Science and Engineering (CaSE) (EUF0005)

101 Q 53 (Mr Gareth Davies)

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