UK Spring Budget: Government announces enhanced tax relief for ‘R&D intensive SMEs’

British Chancellor Jeremy Hunt made a small attempt to assuage concerns over proposed research and development (R&D) tax breaks for small and medium-sized enterprises (SMEs). But there was not the turnaround some expected after the government’s decision. Autumn statement last November.

Today’s announcement is part of the UK’s spring budget, in which Hunt announced a range of investments in the technology sector, including plans for a £1 million annual AI award, quantum investments and a new £1 million exascale computer.

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The research and development tax credit was first introduced by the UK government in 2000 to encourage companies to invest in innovation. Through the program, SMEs can qualify for tax breaks on R&D expenditures that can cover the costs of clinical trials, materials and personnel, while loss-making companies can claim tax credits.

Under the regime, companies are SMEs if they have less than 500 employees and a turnover of less than €100 million or a balance sheet of less than €86 million. If they meet these criteria, they can currently claim an R&D claim of 33% or 33 pence for every £1 spent on R&D. However, with changes announced last November, that figure will drop to 18.6%, or 18.6p for every £1 spent on internal R&D, a drop of 40%.

The announcement drew widespread criticism from across the business and technology spectrum, with the Coalition for a Digital Economy (COADEC) concluding that an average startup could lose around £100,000 a year. And indeed, the move surprised many, especially given Hunt’s much-lauded mantra of making the UK the next Silicon Valley.

In today’s budget, Hunt has not reversed as such as the previously announced cuts continue; However, R&D-intensive startups that make a loss receive a surcharge. Those who spend 40% or more of their total spending on research and development (which is a lot) can claim a tax credit of 27% or £27 per £100 spent.

“That means a legitimate cancer pharmaceutical company that spends £2million on R&D will get more than £500,000 to help them develop innovative treatments,” said Hunt, adding that the total package is around £1.8bn .

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Be that as it may, all SMEs that previously borrowed money for their R&D investments will continue to decline from April 1 compared to before. Overall, the government has said that about 20,000 start-ups will benefit from the full R&D scheme, but only about 11,000 will be eligible for this new addition: 1,000 from the pharmaceutical and life sciences industries; 4,000 for computer programming, consulting, and “related activities” such as AI; and about 6,000 companies in other segments, such as manufacturing.

Brand Smith partner of Ayminga Consulting, which helps companies obtain R&D funding from the government, says today’s announcement is a tacit acknowledgment by the government of its decision last year to cut tax breaks for all SMEs. undermines its ambition to make Britain the next Silicon Valley”, although repair of the latter has been somewhat limited.

“New government funding for R&D-intensive companies will enable the UK’s most innovative companies to do what they do best,” Smith said in a statement to TechCrunch. “The structure the Chancellor has gone through seems reasonable and straightforward, with 40% of spending being a simple number and a target for others to work towards. However, it is much more specific and therefore not as accessible. 40% of R&D expenditure is very high, so only a very small proportion of UK companies qualify.”

In addition, it is not entirely clear how the new legislation will apply and to which specific disciplines, although broader sectors have been identified.

“While your definition of ‘research-intensive SMEs’ is clear, we don’t know which companies and which activities are eligible,” Smith continued. “It would be nice to see green innovation in this. It was a bit disappointing not to hear more about funding R&D in environmental technologies, where the UK could be a world leader. To stimulate the sustainable transition, specific tax incentives for green R&D should be considered. If they can add that to the definitions, it could drive our innovation and our net zero emissions targets.”