UK tech start-ups call for rethink to R&D cuts that ‘punish’ innovation

More than a dozen leading UK start-ups have appealed to Prime Minister Rishi Sunak to rethink proposed cuts to research and development tax credits, arguing the move will “punish” innovative companies and hurt the UK’s standing as a leading destination for tech groups.

Chancellor Jeremy Hunt reworked the government’s R&D tax credits system in the Autumn Statement, cutting the rebates available to small and medium-sized businesses in a bid to reduce fraudulent claims, while increasing credits for larger companies.

But the measures, which come in on April 1 2023, will effectively reduce support for early-stage British tech companies involved in expensive “deep” technologies such as artificial intelligence, biotechnology and climate tech at a time when start-ups are struggling to raise money because of a slowdown in venture capital funding.

Founders of autonomous driving start-up Wayve, artificial meat maker Hoxton Farms and genomic medicines group Ochre Bio are among the 13 companies to have lobbied Sunak, Hunt and other ministers, in a co-ordinated push.

In a letter sent on Friday, seen by the Financial Times, the companies argue the changes amount to a £1bn funding cut for “the UK’s most promising and innovative companies”.

“We’ve seen really strong rhetoric from the government being pro-innovation, pushing the UK to be one of the best environments if you want to come and start a company,” said Alex Kendall, co-founder and chief executive of Wayve, who co-ordinated the letter with tech investors Form Ventures. “[This] feels like a U-turn on that rhetoric and that strategy, which is disappointing to see.”

As a lossmaking start-up, Kendall said Wayve received a rebate of 33 per cent on its R&D costs, a figure that will drop to 19 per cent under the Treasury’s latest plans. The majority of the $260mn the business has raised since 2017 goes towards R&D, leaving it with “a really rushed, unexpected increase in tax liability”, Kendall added.

Ochre Bio, a business developing therapies for liver diseases, received £1mn in tax credits last year but has since tripled its operations. According to the company’s co-founder and chief executive Jack O’Meara, it was projected to receive about £3mn in 2023 and 2024, a figure that would be “cut in half” under the new measures.

“If [the scheme is] suddenly withdrawn it will force us to go out to raise money prematurely,” said O’Meara. “With the VC markets where they are today, a premature pitch is extremely risky for a nascent company.”

Venture capitalists have pulled back from investing in private tech companies this year due to wariness of high inflation, rising interest rates and the war in Ukraine. This has led start-ups to retrench by cutting costs and laying off staff in an effort to make existing funding last longer.

British businesses claimed £6.6bn in tax relief support for R&D in 2020 to 2021, down 6 per cent from the previous year.

According to Office for Budget Responsibility forecasts, the Treasury’s changes to R&D reliefs will save £1.3bn a year by 2027-2028.

Victoria Atkins, chief financial secretary to the Treasury, told the House of Commons in November that £200mn to £300mn of this would be a reduction in fraud and error, meaning more than £1bn would be cut for genuine claims.

In recent weeks, tech companies have met senior ministers, including Atkins and Oliver Dowden, chancellor of the Duchy of Lancaster, to state their case.

In a subsequent letter, seen by the FT, Dowden told O’Meara of Ochre Bio, that the government would assess “how best to ensure high-quality Research & Development intensive SMEs are supported”.

“This scheme really matters to a significant cohort of R&D intensive small businesses that have the potential to scale rapidly,” said Antony Walker, deputy chief executive of TechUK, a trade body for the tech industry. “Let’s finesse the scheme rather than simply cut it.”

The Treasury said: “Our ongoing R&D tax reliefs review is making sure taxpayer’s money is spent as effectively as possible while boosting the UK’s innovation and productivity.

 “The OBR has confirmed the changes won’t reduce business investment for R&D overall, and at £20bn our R&D budget is at the highest level this country has ever seen.”