Improvements to estimation of research and development within gross fixed capital formation and business investment: Blue Book 2025

• The Annual National Accounts (Blue Book) 2025 will include end-to-end redeveloped Business Enterprise Research and Development (BERD) Survey results affecting business and whole economy (gross fixed capital formation) investment; this is the first available opportunity to introduce these into the UK National Accounts.
• Revised BERD data have been used for 2022 and 2023, with earlier years' data back to 1997 being updated from the 2022 level as revised BERD data are not available for this period.
• Improvements to the calculation of the research and development deflator will also be included in Blue Book 2025.

Measuring research and development within the national accounts

Research and development (R&D) activities according to the Organisation for Economic Co-operation and Development's (OECD's) Frascati Manual have to be:

• novel (aimed at new findings)

• creative (have as an objective new concepts or ideas that improve on existing knowledge)

• uncertain (uncertainty about the final outcome)

• systematic (planned and budgeted for)

• transferable/or reproducible (results in the potential for the transfer of the new knowledge, ensuring its use and allowing other researchers to reproduce the results)

R&D has been capitalised (the recording of spending on goods expected to be used repeatedly in production for more than a year as assets, not expenses) in the UK National Accounts since 2014. This was as part of changes introduced by the System of National Accounts 2008 (SNA 08) and European System of Accounts (ESA) 2010.

R&D acquisition consists of purchased (market) R&D, R&D produced for own use, and R&D produced by non-market units. The resulting knowledge would contribute to the creation of a new intellectual property asset and would be owned and used in the productive process for more than a year.

Before 2014, R&D was classed as intermediate consumption, used up within the production process, and so was not a component of gross fixed capital formation (GFCF).

Within SNA 08, R&D GFCF is defined as consisting "of the value of expenditures on creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use of this stock of knowledge to devise new applications".

Data collected through the Business Enterprise Research and Development (BERD) Survey do not align directly with all the concepts needed for the compilation of national accounts estimates. BERD provides expenditure information on R&D performed in-house and R&D purchased by businesses. Therefore, we estimate R&D using BERD data in combination with other data sources to compile estimates on a national accounts basis using the costs of production (sum of costs) and so meeting internationally agreed national accounts concepts. This allows us to estimate R&D spend by:

• businesses – sourced from the ONS's annual Business Enterprise Research and Development (BERD) Survey

• non-profit institutions serving households – sourced from the ONS's biannual "Private Non-Profit R&D" (PNPERD) Survey

• central government – sourced from HM Treasury's "Online System for Central Accounting and Reporting" (OSCAR)

• universities – based on data from the Higher Education Statistics Agency (HESA); data based on the new source were unavailable at the time of production so we were unable to introduce for Blue Book 2025 as previously planned and these will be included in Blue Book 2026 instead

The "sum of costs" approach transforms BERD intramural and extramural expenditures for own use and sale into:

• output of R&D

• non-market output of R&D for government and non-profit institutions serving households

• R&D produced for own final use

• intermediate consumption of R&D

• imports and exports of R&D

• GFCF of R&D

• purchased R&D

Further information on the concepts, sources and methods used internationally to capitalise R&D in the national accounts can be found in the Frascati manual (OECD, 2015) and also the OECD Handbook on Deriving Capital Measures of Intellectual Property Products (PDF, 1.36KB) (OECD, 2010).

Business Enterprise Research and Development

Our 2022 comparison of Office for National Statistics (ONS) business enterprise research and development statistics with HM Revenue and Customs (HMRC) research and development tax credit statistics highlighted the need to address undercoverage by the Business Enterprise Research and Development (BERD) Survey, particularly of small-to-medium-sized businesses.

Among other end-to-end redevelopments, a new sample design was introduced for BERD in 2022 and subsequent reference periods using the Inter-Departmental Business Register (IDBR). In the new sample design, the sample better represents the UK economy, both in terms of regional distribution and by type of R&D performed. Returns from the BERD Survey are weighted to represent the wider population of non-sampled businesses for BERD on the IDBR.

The new sample design is supplemented with data from HMRC. The ONS uses the HMRC R&D tax credit data to identify the top 400 R&D performing businesses. These are combined with the top 400 R&D performing businesses as identified in the previous year's BERD Survey and are sampled by BERD.

Further information on the BERD sample design can be found in our Business enterprise research and development Quality and Methodology Information (QMI).

In Blue Book 2025, we will be incorporating the latest BERD Survey data for 2022 and 2023. Though we previously estimated the impact of 2022 BERD Survey data on published estimates of gross fixed capital formation (GFCF) and business investment at the time in our April 2024 article The impact of new business enterprise research and development survey data on business investment, UK: 2022, we cautioned that the full impact would not be known until data had been taken through the full supply-use annual balancing process within the national accounts.

It has also been necessary to construct a data back series consistent with the revised level in line with the usual national accounts practice where a new or improved source becomes available.

After outputs from the 2022 Business Enterprise Research and Development (BERD) Survey were transformed into national accounts concepts (gross fixed capital formation (GFCF), market output of research and development (R&D), R&D produced for own final use, gross operating surplus) at a two-digit industry level, they were compared with previously published estimates using the previous BERD methodology to create a join between 2021 and 2022 and adjust the previous level in line with the new estimate. The newly created data were then balanced as part of the supply use process for the period 1997 to 2023 to ensure coherence between the transactions.

Work to develop a BERD back data series to 1997, which will include the greater level of detail required by BERD stakeholders, is progressing separately. However, because an aggregate back series was needed for Blue Book 2025, we are incorporating the R&D back series at this stage. Once the detailed BERD back series is available, we will review the R&D back series in the national accounts and make any necessary updates at the earliest opportunity to ensure consistency.

All changes to sources and methods that affect components of UK gross domestic product (GDP) go through the supply and use balancing process. This ensures that all products available for consumption in the UK (either produced domestically or imported) are accounted for by a use, and that the total output of each industry is the sum of the inputs (primarily the cost of goods and services used, the cost of labour, and the operating surplus remaining with producing businesses).

This process involves reconciling the improved data (considering research and development in this case) against other sources that have not changed, and re-evaluating these balances accordingly. In this way, we produce a fully reconciled estimate of UK GDP.

Research and development deflator

Following feedback on international comparisons of equivalent research and development (R&D) deflators used in the compilation of gross fixed capital formation (GFCF) R&D, we have reviewed the compilation methods used for the R&D deflator and identified improvements to the labour input component by using average wages based on Annual Survey of Hours and Earnings (ASHE) data. These improvements bring the R&D deflator more in line internationally and will be included in our Blue Book 2025 dataset.

Further information is available in our Deflator improvements to the UK National Accounts: Blue Book 2025 article.

Publication within the national accounts

The combined impact of the revised Business Enterprise Research and Development (BERD) data, new back series, and deflator improvements, will be available for the first time in our Blue Book 2025 publication. This will be published in our Blue Book-consistent September 2025 Business investment and Quarterly national accounts publications.