Tens of thousands of innovative small firms are set to scale back investment if government presses ahead with plans to slash R&D tax support for SMEs, according to new research by the Federation of Small Businesses (FSB).
The UK’s largest business group is urging the government to change course on its decision to gut the R&D tax relief scheme for small firms as announced in the Autumn Statement. 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.
An overwhelming majority (64%) of small firms which successfully applied for the tax credits in the last three years say they are now less likely to invest in innovation, equivalent to 50,000 small firms. A quarter (24%) say they will be forced to turn to lower-risk projects and one in ten (12%) say they will have to make staff redundant or put recruitment plans on hold.
The new FSB research shows the impact will be greatest in deterring new entrants. Since the scheme was introduced, around 30 per cent of small firms claiming R&D tax relief each year are new claimants, and FSB research indicates the long-time deterrent impact on potential innovators is even larger than on small firms already innovating, with four times as many firms not currently undertaking R&D saying they are now less likely to take the plunge.
The huge recent growth in UK R&D spending has been driven by additional small firms and start-ups setting up for the first time, with the number of small innovating firms more than doubling since the tax relief on R&D was increased to its current levels – leading to the latest official figures show more than a half of the UK’s total business expenditure on R&D comes from small firms for the first time.
Small firms were left astonished by the move. They labelled the Chancellor’s decision to rely on estimates for the effect of R&D which excluded the impact on start-ups and new entrants as “the kind of basic error that leaves even the best idea for a prototype a smoking ruin on the ground”, and “not worthy of a country with our history of innovators, innovation and enterprise” but said they hoped he had realised when presented with bureaucratic certainty that only big firms can deliver R&D and that there were very encouraging recent signs of hope that the Chancellor has not forgotten his small business roots.
The group warned against giving further money intended for private sector innovation to public grant schemes administered by “quangos many inventors haven’t heard of, meaning time wasted writing bid applications instead of innovating.
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.”