UK government admits R&D-heavy small companies need more tax help

UK ministers have opened the door to providing further research and development tax support for small companies following an outcry from trade bodies over plans to cut an existing scheme used to fund innovation.

Tech founders and business groups in November criticised chancellor Jeremy Hunt’s proposals to cut R&D tax credits at a time when the government is trying to talk up its ambitions to make the UK a science superpower.

The credits are widely used by biotech and tech start-ups, which are leading advances in innovative treatments and emerging technologies such as quantum computing.

But in a consultation document published on Friday, the government said it recognised that the reform “creates challenges for some R&D-intensive small and medium-sized enterprises and those in the life sciences sector in particular”. It added that there was “merit to the case for further support”. 

The pledge for extra help for SMEs was cautiously welcomed by business groups, which added that it was unclear what kind of support ministers would offer and to how many companies.

Some also said proposals to merge two separate tax credit schemes risked leaving SMEs worse off, with support still expected to come in below the level it was at before Hunt’s Autumn Statement in November.

The government plans to make tax credits for small companies much less generous from April. It says the UK has one of the most generous R&D tax relief systems but is concerned that the level of investment in R&D by UK businesses has lagged behind other countries.

Whitehall officials said the scaling back of the tax credit system was designed to address concerns over fraud and misuse.

Business groups have been in talks with Treasury officials since Hunt announced the reforms. Recent discussions suggested that the finance ministry was open to further helping companies in the tech and life sciences industries in particular, according to people familiar with the matter.

This may mean a more targeted approach, according to those people, with officials reluctant to forgo too much of the cost savings that come from scaling back the scheme.

Dom Hallas, head of Coadec, which represents UK start-ups, welcomed ministers’ acknowledgment of the challenges posed to tech start-ups by potential changes.

But Craig Beaumont, external affairs chief at the Federation of Small Businesses, said the consultation only covered the period from April 2024, “a year after the cuts to small business R&D hit in April 2023”. 

“We appreciate the change of tone and commitment to look at the issues we have raised . . . and hope this is followed up with a transition period for 2023-24,” he said. “It doesn’t make much economic sense to slash in 2023-24 only to rebuild in 2024-25.”

Andrew Bennett, policy lead at Form Ventures, which advises and invests in UK start-ups, said the imminent cuts to tax credits were “what really matters” to portfolio companies. “At minimum, the existing SME scheme should be retained until a new scheme is in place.”

Under the present scheme, SMEs can claim a rebate on about one-third of their R&D costs, compared with 13 per cent for larger businesses. The figure for bigger companies is due to increase to 20 per cent in April.

The prospect of bringing spending under one scheme meant “R&D-intensive companies may be looking at this with a bit of trepidation”, said Neil Ross, associate director of policy at trade group TechUK. “It’s potentially opening the door to further cuts.”

Martin Turner, head of policy and public affairs at the BioIndustry Association, the biotech trade body, said merging R&D tax relief was a “great opportunity” to reduce fraud, and support the most economically valuable companies.

But he warned that the government also risked scoring an “own goal” by removing a key policy that had supported life sciences growth.