SMEs tell Government We Need R&D Tax Support

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      According to new data from the Federation of Small Businesses, tens of thousands of creative small businesses are prepared to reduce their investment if the government moves forward with proposals to reduce R&D tax help for SMEs (FSB).

      The largest business organization in the UK is pleading with the government to reverse its decision to eliminate the R&D tax relief program for small businesses, which was announced in the Autumn Statement. One in five small businesses that have benefited from the program over the past three years claims that tax relief rate reductions will make them less viable.

      The vast majority (64%) of small businesses that were successful in applying for tax credits in the last three years, or 50,000 small businesses, report that they are now less inclined to invest in innovation. One in ten (12%) believe they will have to lay off employees or postpone hiring plans, and a quarter (24%) say they will be compelled to switch to lower-risk initiatives.

      The impact of preventing new entrants will be the highest, according to the latest FSB analysis. According to FSB research, four times as many small businesses that are not currently conducting R&D say they are now less likely to take the plunge. Since the scheme was introduced, about 30% of small businesses claiming R&D tax relief each year are new claimants. This suggests that the long-term deterrent impact on potential innovators is even larger than the impact on small businesses already innovating.

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      The huge recent growth in UK R&D spending has been driven by more small firms and start-ups setting up for the first time. Since the tax relief on R&D was increased to its current levels, the number of small innovative firms has more than doubled, and the most recent official figures show that small firms now account for more than half of the UK’s total business expenditure on R&D.

      Small businesses were shocked by the action. They criticized the Chancellor’s choice to rely on estimates for the effect of R&D that did not take start-ups and new entrants into account, calling it “not worthy of a country with our history of innovators, innovation, and enterprise” and “the kind of basic error that leaves even the best idea for a prototype a smoking ruin on the ground.” However, they expressed hope that he had realized when faced with bureaucratic certainty that only big firms can deliver R&D there.

      The organization issued a warning against contributing additional funds meant for private sector innovation to public award programs run by “quangos many inventors haven’t heard of, meaning time lost preparing bid applications instead of developing.”

      “We’re nearing deadline day to find out if the Chancellor will support the agile upstarts that risk everything on R&D,” said Martin McTague, National Head of the Federation of Small Businesses (FSB). If Jeremy Hunt does not take charge of Treasury innovation policy and reinstate the most effective industrial strategy of the past ten years, the UK risks becoming an innovation wasteland.

      Our findings serve as a reminder to the Chancellor that there is still time for the Government to act morally and postpone or abandon its intention to reduce R&D tax credits for small firms starting in April.

      “The Chancellor’s decision to rely on estimates that do not take into account the impact on start-ups and new entrants in making this decision was extremely disappointing. This type of fundamental mistake renders even the best prototype idea into a smoking ruin on the ground and is unworthy of a nation with our history of innovators, innovation, and enterprise.

      Yet, there have been some very positive recent indications that the chancellor is still committed to supporting small businesses, and we think it’s feasible he will provide an excellent budget for expansion. We can only hope that he will now be less likely to believe the bureaucratic certainty that only large companies can deliver R&D.

      “Our members tell us that the tax credit program is more accessible and practical than grants for developing cutting-edge goods and services in the UK. It enables R&D to be led by small businesses, which can respond to new opportunities much more quickly than quango-managed public grant programs, which require applicants to spend time writing proposals rather than innovating.

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      Just as we’re aiming to build more UK digital start-ups, we’ve heard stories that startups intend to go abroad where R&D funding for small enterprises is more substantial. However, eliminating the R&D tax credit program will be fatal to the prime minister’s goal of making our nation a global leader in research and technology.

      “Instead of trying to go back in time, the government should be proud of its progress in boosting the number of creative small businesses and fresh start-ups. The Spring Budget, which will match Rishi Sunak’s objective to leverage innovation to generate development, will be watched closely by small businesses.

      “The SME R&D tax credits system has been fantastic in encouraging small firms to invest for the first time in R&D, and we must do everything we can to prevent throwing away ten years of small company development,” said the SME R&D tax credits scheme’s creator.

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