Business group warns that cuts to R&D tax relief could cause the UK to become ‘innovation wasteland’

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The UK is at risk of becoming an “innovation wasteland” if the Government proceeds with its previously announced plans to reduce research and development (R&D) tax relief, according to the Federation of Small Businesses (FSB).

Chancellor Jeremy Hunt revealed in his Autumn Budget in November that the tax relief for small firms would be slashed from 14.5% to 10%. The move has raised fears that many SMEs in the UK could be left struggling to obtain sufficient funding for R&D – and with the Spring Budget now looming on 15th March, the FSB has called on ministers to scrap the plans.

The FSB – which is the UK’s biggest business group – has said that the R&D tax relief cut would lead to many UK small and medium-sized firms withdrawing from innovation projects.

However, as reported by City A.M., the Treasury has hit back, stating that it recognises R&D as “hugely important”, and that the tax relief review will “ensure taxpayers’ money is spent as effectively as possible”.

Signs that thousands of UK small businesses will lower their innovation investment

The Chancellor stated in his previous announcement that he was scaling back the rebate in order to reduce fraud. He did heighten the R&D expenditure credit (RDEC) from 13% to 20%, but RDEC is not as valuable for start-ups, given that it doesn’t provide a cash repayment.

And the FSB’s own research has already indicated what the consequences of these decisions could be. The organisation found that 64% of the firms to have earned the tax credits in the last three years would now lower their innovation investment as a consequence of the changes – the equivalent of about 50,000 small businesses.

A quarter of firms that the FSB polled said that the move would prompt them to switch their focus to “lower-risk” projects. Meanwhile, around 12% of respondents said the changes had already led to them freezing recruitment and laying off staff.

“The single most successful industrial policy of the last decade”

Martin McTague, National Chair at the FSB, said that the findings underscored the crucial role the R&D tax relief played. He added that the Treasury was now coming up to “deadline day” to decide whether to scrap the planned reduction.

He commented in a statement: “The UK risks being left in an innovation wasteland if Jeremy Hunt does not take control of Treasury innovation policy and restore the single most successful industrial policy of the last decade.

“Our findings are a reminder to the Chancellor that the Government still has time to do the right thing – delay or scrap the plan to cut R&D tax credits for small businesses from April.”

However, in response, a Treasury spokesperson said to City A.M. that “the Government recognises the hugely important role that R&D and innovation play for the economy and society.”

The spokesperson added: “Our ongoing R&D tax reliefs review will ensure taxpayers’ money is spent as effectively as possible while improving the competitiveness of the RDEC scheme, as well as taking a step towards a simplified, single RDEC-like scheme for all.

“The Government will work with industry over the coming months to understand whether further support is necessary for R&D-intensive SMEs.”

Is your firm tapping into the maximum benefits of R&D tax credits in Newton Abbot, Wellington, or Plymouth?

Whatever occurs in the future with R&D tax relief for small businesses in the UK, it is important that your own company is well-informed on how the available R&D tax credits in Newton Abbot, Plymouth, or Wellington could support your innovation and investment plans.

To learn more about our own expertise in R&D tax relief or about any of our other services for SMEs in the South West of England and beyond, please reach out now to your closest TS Partners office.