UK Chancellor Jeremy Hunt has gone some way towards addressing concerns over proposed cuts to research and development (R&D) tax credits for small and medium-sized enterprises (SMEs). But he fell short of the turnaround some had hoped would follow the Government’s Autumn Statement last November.
Today’s announcement came as part of the UK’s Spring Budget, where Hunt revealed a number of tech investments, including plans for a £1m annual AI prize, quantum investments and a new £900m ‘exascale’ computer.
The R&D Tax Credit scheme was first introduced by the UK government back in 2000 to encourage businesses to invest in innovation. Through the scheme, SMEs can be eligible for tax credits on R&D expenditure, which can cover clinical trial costs, materials and staff, while loss-making businesses can apply for cash tax credits.
Under the scheme, companies are classified as SMEs if they have fewer than 500 employees and a turnover of less than €100 million or a balance sheet of less than €86 million. If they meet those criteria, claimants can currently claim R&D at 33%, or 33p for every £1 they spend on R&D. Changes announced last November, however, will see that figure drop to 18.6%, or 18.6p for every £1 spent on in-house R&D, an effective reduction of 40%.
The announcement was met with considerable criticism from across the business and technology spectrum, with the Coalition for the Digital Economy (COADEC) concluding that the average start-up could lose around £100,000 a year. And the move actually surprised many, especially given Hunt’s much-trumpeted mantra of making the UK the next Silicon Valley.
In his budget today, Hunt made no U-turns as such, given that the previously announced cut will remain, however loss-making “Research-intensive” startups will get a boost there. Those who spend 40% or more of their total output on R&D (whichever is more) will be able to claim 27% or £27 for every £100 spent.
“It means an eligible cancer drug company that spends £2m on research and development will receive more than £500,000 to help them develop a breakthrough treatment,” Hunt said, adding that the total package is around £1 .8 billion pounds.
However, the way we look at it, all SMEs that previously claimed credit for their R&D investment will still see a reduction from April 1st. In total, the Government said around 20,000 startups would benefit from the R&D scheme, but only around 11,000 would qualify for this new funding tranche; 4,000 from computer programming, consulting and “related activities” such as AI; and about 6,000 companies from other sectors such as manufacturing.
Mark Smith, a partner at Ayming, a consultancy that helps businesses secure Government R&D funding, said today’s announcement was a tacit admission by the Government that last year’s decision to cut tax breaks for all SMEs “is disrupting Britain’s next his ambitions to make silicon. Valley,” although this latter compensation is somewhat limited.
“New government funding for R&D-intensive businesses will allow the UK’s most innovative companies to do what they do best,” Smith said in a statement to TechCrunch. “The structure that the Chancellor has run on sounds sensible and straightforward, with 40 per cent of spending being a simple number and a target for others to work towards. However, it is much more targeted and therefore not as accessible. Forty per cent of spending on research and development is very high, so only a very small proportion of UK businesses are eligible.”
In addition, it is not entirely clear how the new legislation will be applied and in which specific areas, even if it has identified broader areas.
“While its definition of a ‘research-intensive SME’ is clear, we do not know which companies and which activities may be eligible,” Smith continued. “It would be great to see green innovation incorporated into it. It was a little disappointing not to hear about funding for research and development of environmental technologies in which the UK could be a world leader. To promote a sustainable transition, specific tax incentives should be considered around green R&D. If they can include that in the definitions, it can boost both our innovation and net zero goals.”