UK Spring Budget: Government trumpets improved tax relief scheme for ‘R&D-intensive SMEs’

U.K. Chancellor Jeremy Hunt went a small way toward addressing concerns over proposed research and development (R&D) tax credit cuts for small-and-medium sized enterprises (SMEs). But he stopped short of the u-turn some had hoped for following the Government’s Autumn Statement last November.

Today’s announcement came as part of the U.K.’s Spring Budget, where Hunt revealed a number of investments into the technology sector, including plans for a £1 million annual AI prize, quantum investments, and a new £900 million ‘exascale’ computer.

‘R&D-intensive’

The R&D Tax Credit scheme was first introduced by the U.K. Government back in 2000, designed to entice businesses to invest in innovation. Through the scheme, SMEs can qualify for tax relief for R&D expenditure, which might cover clinical trial costs, materials, and staffing, while loss-making businesses can apply for cash tax credits.

Under the scheme, businesses are classed as SMEs if they have fewer than 500 employees, and a turnover of less than €100 million or a balance sheet that falls below €86 million. If they meet that criteria, loss-makers can currently apply for an R&D claim of 33%, or 33p for every £1 they spend on R&D. With the changes announced last November, however, that figure was set to drop to 18.6%, or 18.6p for every £1 spent on in-house R&D — effectively a 40% decrease.

The announcement had sparked significant criticism from across the business and technology spectrum, with the Coalition for a Digital Economy (COADEC) concluding that the average startup could stand to lose around £100,000 per year. And in truth, the move had surprised many, particularly given Hunt’s much-trumpeted mantra about making the U.K. the next Silicon Valley.

In his budget today, Hunt didn’t do an about turn as such, given that the previously announced reduction will remain in place — however, loss-making “R&D-intensive” startups out there will receive a top-up. Those that spend 40% or more of their total outgoings on R&D (which is a lot) will be able to claim a tax credit of 27%, or £27 for every £100 spent.

“That means an eligible cancer drug company spending £2 million on research and development will receive over £500,000 to help them develop breakthrough treatments,” Hunt said, adding that the overall package amounts to around £1.8 billion.

Redress

But however we look at this, all SMEs that previously claimed credits for their R&D investments will still be down starting from April 1 compared to before. In total, the Government said that some 20,000 startups will benefit from R&D scheme overall, but only around 11,000 will qualify for this new top-up portion: 1,000 from the pharmaceutical and life sciences industry; 4,000 from computer programming, consultancy, and “related activities,” such as AI; and around 6,000 firms from other segments such as manufacturing.

Mark Smith, partner at Ayming, a consultancy that helps businesses secure Government R&D funding, says that today’s announcement is a tacit acknowledgement from the Government that its decision last year to cut tax relief for all SMEs “undermines its ambition to make Britain the next Silicon Valley,” though this latest redress is somewhat limited.

“The Government’s new funding for R&D-intensive businesses will allow the U.K.’s most innovative businesses to do what they do greatest,” Smith said in a statement issued to TechCrunch. “The structure the Chancellor ran through sounds sensible and clear, with 40 percent of spend being a straightforward figure and goal for others to work to. However, it is a lot more targeted and therefore not as accessible. Forty percent of spend on R&D is very high, so only a very small portion of U.K. businesses will be eligible.”

On top of that, it’s not entirely clear how the new legislation will be applied, and to what specific disciplines, even if it has identified broader industries.

“While its definition of ‘research-intensive SMEs’ is clear, we don’t know which businesses and what activity will be eligible,” Smith continued. “It would be great to see green innovation incorporated into this. It was a little disappointing not to hear more mention of funding relating to R&D in environmental technologies, which the U.K. could be a world leader at. To drive forward the sustainable transition, specific tax incentives must be considered around green R&D. If they can include that in definitions, it could provide a boost both to our innovation and net-zero objectives.”