On 17 November 2022, Chancellor of the Exchequer, Jeremy Hunt, gave everyone a new plan of action.
If you’re a startup or scaleup leader, the final version of this budget will undoubtedly affect you over the coming years.
Before the announcement, Rishi Sunak said, “No one can doubt my commitment personally to ensuring the UK remains a scientific and technological superpower; that’s why we’ve increased the R&D budget“.
But it transpires that some of the biggest changes proposed are to cut funding for small to medium businesses (SMEs) conducting R&D and claiming R&D tax relief.
We’ve broken down the plan as it relates to R&D for SMEs. They promised the next Silicon Valley, so did they deliver?
“The UK is now in a recession.”
Those were the first words from the OBR forecast, which opened the Autumn Statement.
What followed was a grim outlook of the future with rising interest rates, unemployment, and inflation.
Government borrowing will halve over the next 5 years from 7.1% of GDP, to 2.4% by 2027/28.
The Chancellor then announced that in order to get out of the recession, they are taking a ‘Balanced path to stability [...] by taking difficult decisions.’
Unfortunately, it seems SMEs are taking the brunt of this ‘re-balancing’. Let’s get into it.
Increased public spending on R&D
Overall spending on R&D will increase to £20 billion a year by 2024-25, a cash increase of around a third compared to 2021-22.
This seems like a step in the right direction to creating ‘the next Silicon Valley’ until you realise this increase is, in fact, allocated to larger corporations and not SMEs (who, being primarily loss-making, need it now more than ever).
Increased R&D relief for large companies
The rate for the Research and Development Expenditure Credit (RDEC) scheme, designed for larger companies conducting R&D, will increase from 13% to 20% for expenditure.
This is clearly a sign from the government that they value R&D among larger companies more than SMEs. Given that the statistics provided by the ONS show SMEs are conducting equal or more R&D than their larger peers. Confusing the team at Claimer.
This is to be legislated into the Autumn Finance Bill 2022, and is apparently a step towards the government’s stated goal of developing a single simplified RDEC-like scheme for all companies.
There’s no information yet on what a single RDEC scheme could look like. As soon as we know, you’ll know (subscribe to the Claimer Newsletter below for all the latest news affecting startups/scaleups).
R&D relief cut by up to 55% for SMEs
A £4.5 billion cut to R&D Tax Credits for start-ups and SMEs was announced by the Chancellor with the following measures:
- Deduction will decrease from 130% to 86%
- SME credit rate will decrease from 14.5% to 10%
In plain terms, this cuts the effective amount of expenditure a loss-making SME is able to reclaim to 18.6%, previously 33.45%, a reduction of up to 44%. For SMEs that are breaking even, the effect of the changes reduces the credit by 55%.
In his speech, the Chancellor linked this decrease to widespread fraud and abuse in the SME scheme. Essentially, characterising it as a ‘protective’ measure to reduce waste.
However, HMRC estimates that fraud and error within the SME scheme totals £430m annually. This represents less than 10% of the £4.5bn reduction in the value of the scheme.
Additionally, HMRC have implemented several measures in order to cut fraud and incorrect claims outside of this cut.
Claimer expects both of these changes to cause significant collateral damage to legitimately claiming SMEs, and we are already pushing back to HMRC, the Treasury, and politicians.
What will this look like for startups at different levels?
- Large companies and SMEs claiming under the RDEC
Under the RDEC, a company spending £100K on R&D would receive a credit of £15,000, an increase of 42% from the previous rate of 10.53%.
- SME with a taxable profit of £250K
An SME with profits of £250K and R&D spend of £100K can expect a tax saving of £21,500, a decrease from the previous £24,700 and a reduction of about 13%.
- SME at break-even point
An SME at break-even point claiming tax relief for £100k of R&D expenditure would see a cash credit of £8,600, a decrease from a previous £18,850. That’s a whopping reduction of nearly 55%.
- SME with sufficient losses (capped restriction apply)
This is the real target of the treasury’s ‘unfriendly’ cuts and the majority of UK’s SMEs claiming R&D. It’s also a fast-growing source of early-stage innovation in tech and science, which is now at risk of slowing down.
Under the new bill, loss-making SMEs can claim an R&D cash credit of 18.6%, previously 33.45%. So on an R&D expenditure of £100K, they’ll be able to claim just £18,600.
There is some hope left for SMEs
The legislation is not finalised yet, and Claimer’s sources have said the chancellor has been surprised at the negative response to these changes.
The statement indicated that the Treasury “will work with the industry” ahead of the next Budget to understand whether further support is necessary for R&D-intensive SMEs.
But that still leaves SMEs that are conducting additive but ‘non-intensive’ R&D. Anecdotally, we’ve already heard founders and CEOs make u-turns on commitments to move their R&D resources into the UK following the statement.
Claimer is currently in dialogue with industry bodies and fighting alongside them on behalf of SMEs. There is also more than one initiative underway to illustrate to the chancellor how much damage these changes will do to SMEs and the economy.
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