UK companies in life sciences and artificial intelligence have welcomed a partial retreat by the government on reductions to research and development support but most small businesses still face looming cuts.
In his Budget on Wednesday, chancellor Jeremy Hunt said he was “harnessing British ingenuity to make us a science and technology superpower”.
He announced extra tax credit support for businesses that spend more than 40 per cent of their total costs on R&D, with winners including 1,000 companies in the pharmaceuticals and life sciences sectors and 4,000 in sectors such as AI, machine learning and computer programming.
But the government will press ahead with cuts announced in the Autumn Statement last year to R&D tax credits for most small tech companies, in an effort to claw back money and reduce fraudulent claims.
While eligible lossmaking businesses will be able to claim £27 from HM Revenue & Customs for every £100 of R&D investment, non R&D-intensive lossmaking companies will receive £18.60 from April 1, far below the roughly 33 per cent rebate now offered to small businesses.
“Slashing R&D tax credits seems to me like it’s taking a sledgehammer to crack a nut,” said Tessa Clarke, co-founder and chief executive of Olio, an app-based platform that tackles food waste by allowing businesses and consumers to give away items for free. “If they’re concerned about wastage they should revisit the detail, rather than this draconian approach.”
The UK’s biotech companies are among the winners under the new slimmed-down tax credit scheme because they tend to spend more on R&D than tech start-ups. Hunt gave the example of a cancer drug company spending £2mn on R&D, which would receive more than £500,000 in tax credits.
Industry figures had warned that lower funding would have hit clinical trials and led to more companies investing outside of the UK.
Jack O’Meara, co-founder and chief executive of Ochre Bio, an Oxford-based company developing therapies for liver diseases, which dedicates about 80 per cent of its spend to R&D, said Hunt’s announcement “provides comfort for small innovative companies like mine . . . creating jobs, developing new medicines and improving healthcare for patients”.
Steve Bates, chief executive of the BioIndustry Association, said the new scheme was a “great opportunity for the UK to fine-tune and enhance” the incentive for investment in innovation, while ensuring it “eliminates fraud”.
Curbing fraud was the Treasury’s initial justification for restricting the scheme last autumn. According to HMRC, spurious claims amounted to £496mn last year — 5 per cent of the total cost and a rise from 3.6 per cent compared with 2020-2021 and 2019-2020.
But the government also wants to trim the scheme’s overall costs. Claims for R&D support increased from 35,565 in 2014-2015 to 89,300 in 2021-2022, according to the tax authority, with 78,825 of those from by small and medium-sized enterprises. The price of R&D support to the Exchequer has also risen from £3bn to £6.6bn in the same period.
The threshold is too high for small companies with less R&D-intensive business models; they said the cuts would hit the government’s growth ambitions.
Martin McTague, national chair of the Federation of Small Businesses, said most “firms who fall outside of the 40 per cent intensity threshold will be left feeling mystified by the change in policy since last autumn”.
Start-ups spending below the threshold would on average receive £100,000 less in support under the new scheme — equivalent to a 30-40 per cent reduction in funding, according to a survey of 150 tech founders by Coadec, a lobby group.
Clarke at Olio — which will cease to qualify for the tax credits — said they had been “absolutely invaluable”, with the business claiming for as much as £250,000 a year in the past to support investment in its platform and engineers’ salaries.
The 40 per cent threshold also risks hitting start-ups as they scale, when spending on R&D tends to fall as other business expenses such as marketing and non R&D-related staff costs mount.
Eddie McGoldrick said his Electric Storage Company, a Belfast-based start-up that connects businesses to renewable sources of electricity at the lowest possible prices through its software platform, would qualify for extra support this year but could slip under the threshold in future.
The business, founded in 2017, has roughly 120 clients and is expanding internationally, with the aim of selling its tech to large companies that work across multiple locations. It spent £1mn on its platform in 2022, receiving a rebate of almost £100,000.
“R&D is a nice little buffer for us”, said McGoldrick, adding that he was “heartened” by the changes. “This year, our R&D spend will be about 55-60 per cent but this may be the last year where we are at the higher rate.”
Some warned the cuts would also not fix fraudulent claims and waste. In January, a House of Lords committee report found reforms to the scheme would “not be effective in isolation” and the government needed to improve compliance efforts. The government has previously said it is taking steps to “increasing compliance resource and activity”.
Leo Ringer, founding partner at UK-focused venture capital fund Form Ventures, said Wednesday’s announcement didn’t “really speak to the question of fraud. We’re still left with a position where it’s hard to see this as anything but a straightforward cut to UK fiscal support for innovation”.
Additional reporting by Daniel Thomas
This article was amended after publication to reflect the cost to the Exchequer of R&D support from 2014 to 2022.