The latest statistics from the Office of National Statistics showed officially for the first time that the majority of business investment in R&D comes from SMEs and comes less than a week after the Chancellor slashed the tax support available for cutting-edge small firms by a third, leaving tech start-ups, university spin-outs, and advanced engineering companies scrambling to maintain their research as the last-minute change hits in less than six months.
Last week, new Chancellor Jeremy Hunt cut the rate of R&D tax relief for small businesses in his autumn budget.
HM Treasury stated that: “This reform ensures that taxpayer support is as effective as possible, improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all. The government will consult on the design of a single scheme, and ahead of Budget work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost envelope for supporting R&D. As previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, and targeting abuse and improving compliance.”
But the new figures from the ONS revealed that companies with fewer than 250 employees contributed £24.3 billion in investment in R&D last year, an increase of £4.3 billion from 2018.
Those with more than 250 employees contributed £22.6 billion in R&D investment last year. The ONS has fixed methodological issues that led to it undercounting smaller firms compared to large ones in previous surveys and which still impact its pre-2018 estimate.
The business sector contributed £44 billion — the equivalent of 71 per cent — of R&D funding in 2020, followed by universities, which pumped in £13.9 billion or 22 per cent.
The government, including its research funding body UK Research and Innovation (UKRI), supported just 5 per cent of funding in the year the COVID-19 pandemic hit the country, injecting £3.1 billion into R&D.
Federation of Small Businesses (FSB) policy & advocacy chair, Tina McKenzie, said this should have been a moment of triumph for the small-business community and the UK economy.
“But the Chancellor has turned triumph to disaster, with the self-inflicted R&D credit crunch set to cut a swathe through start-ups, spin-outs and advanced engineering companies. Driving small R&D firms out of business is economic vandalism,” she said.
“The Government needs to think again and reverse course before this change comes in in less than six months. They’re clearly working on out-of-date assumptions and data. Anyone living in the UK in the last 10 years can’t help but notice the exciting new technology and the proliferation of high tech start-ups. To turn our back on that success is wrong.
“Plans have been made, employees hired and funding committed. Firms will be blindsided by this unprovoked attack on their hard work. Our inventors, scientists, engineers and entrepreneurs need a government that backs them, not one that drives them out of business.
“The Prime Minister and the Chancellor are saying one thing on R&D and doing another. The Prime Minister’s call yesterday to ‘harness innovation to drive economic growth’ is quite the opposite of what he and his Chancellor proposed last week, who decided now is the time to undo the UK’s success and kill innovation by slashing support for innovative but under-resourced small businesses with less than six months’ notice.”
