Government R&D tax support cut to create “innovation wasteland”

Research by the Federation of Small Businesses (FSB) has concluded that the UK’s SMEs will pull back sharply on innovating if the Government pushes ahead with slashing tax relief against R&D investment.

Tens of thousands of businesses reporting into the UK’s largest business group have expressed dismay at plans to gut the tax relief currently on offer, which provides such businesses with the bandwidth to try creative things and innovate. As such, one in five small firms that have been supported through the scheme in the last three years say cuts to the tax relief rate will reduce their viability.

Further concerning, it is expected that newer market entrants will be stopped in their tracks, unable to take on the risk of investing in R&D due to the heavy costs involved. The FSB’s assessment of the impact on market entrants is showing that since the scheme was introduced around 30% of small businesses claiming the tax break were new claimants. Ultimately this will lead to a long-term deterrent on new businesses. The suggestion is that “four times as many firms not currently undertaking R&D saying they are now less likely to take the plunge.”

In the last three years 64% of small firms successfully applied for the tax credits against their R&D work. A quarter (24%) now say they will be forced to turn to lower-risk projects and just over a tenth (12%) say they will have to make redundancies, or put recruitment plans on hold.

Martin McTague, National Chair of the Federation of Small Businesses (FSB) said: “We’re approaching deadline day to find out if the Chancellor will back the nimble upstarts who risk everything on R&D. The UK risks being left in an innovation wasteland if Jeremy Hunt does not take control of Treasury innovation policy and restore the single most successful industrial policy of the last decade.

“Our findings are a reminder to the Chancellor that the Government still has time to do the right thing – delay or scrap the plan to cut R&D tax credits for small businesses from April.

“The Chancellor’s decision to rely on estimates that exclude the impact on start-ups and new entrants in making this decision was incredibly disappointing – the kind of basic error that leaves even the best idea for a prototype a smoking ruin on the ground, not worthy of a country with our history of innovators, innovation, and enterprise.

“However, there are very encouraging recent signs of hope that the Chancellor has not forgotten his small business roots, and we certainly think it’s possible he could deliver a great budget for growth. Let’s hope he will now be less credulous when presented with bureaucratic certainty that only big firms can deliver R&D.

“Our members tell us the tax credits scheme is more accessible and useful than grants in creating cutting-edge products and services in the UK – it means R&D is led by small firms who can react far quicker to new possibilities than public grant systems administered by quangos many inventors haven’t heard of, meaning time wasted writing bid applications instead of innovating.

“We’ve also heard of reports that start-ups plan to expand overseas where R&D support for small firms is more generous, just when we’re looking at growing more UK tech start-ups. Gutting the R&D tax credits scheme will sadly be kryptonite for the Prime Minister’s pledge to make our country a science and technology superpower.

“The Government should be proud of its success in increasing the number of innovative small firms and new start-ups, not seeking to turn the clock back to the dark ages. Small firms will be looking at the Spring Budget where Rishi Sunak’s ambition to harness innovation to drive growth will be matched by policy decisions.

“The SME R&D tax credits scheme has been brilliant in encouraging small businesses to invest for the first time in R&D and we must do everything we can to avoid throwing away ten years of small business progress.”