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

UK Chancellor Jeremy Hunt has taken a small step to address concerns over proposed cuts to research and development (R&D) tax credits for small and medium-sized enterprises (SMEs). But it stopped before the U-turn some were hoping for following the government’s decision Fall statement last November.

Today’s announcement comes as part of the UK’s Spring Budget, where Hunt revealed a number of investments in the tech sector, including plans for an annual £1m AI prize, quantum investments and a new £900m ‘exascale’ computer.

‘R&D intensive’

The R&D tax credit scheme was first introduced by the UK government in 2000, designed to incentivize companies to invest in innovation. Through this program, SMEs can receive tax relief for R&D expenses, which can cover clinical trial costs, materials and personnel, while loss-making companies can apply for cash tax credits.

Under this system, companies are qualified as SMEs if they have fewer than 500 employees, a turnover of less than 100 million euros or a balance sheet of less than 86 million euros. If they meet these criteria, loss-makers can currently claim a 33% R&D claim, or 33p for every pound spent on R&D. However, with the changes announced last November, this figure was about to fall at 18.6%, or 18.6 pence for every pound spent on in-house R&D, a decrease of 40%.

The announcement triggered important reviews from all commercial and technological backgrounds, with the Coalition for a Digital Economy (COADEC) final that an average startup could lose around £100,000 a year. And in truth, the move had surprised many, especially given Hunt’s much-trumpeted mantra about make the UK the next Silicon Valley.

In his budget today, Hunt didn’t do an about-face as such, given that the previously announced cut will remain in place — however, loss-making “R&D-intensive” startups will receive a top-up. Those who spend 40% or more of their total expenditure on R&D (which is a lot) will be able to claim a tax credit of 27%, or £27 per £100 spent.

“This means that an eligible cancer drug company spending £2million on research and development will receive over £500,000 to help develop breakthrough treatments,” Hunt said, adding that the overall amount stands at around £1.8 billion.

To sort out

But no matter how we look at it, all SMEs that previously claimed credits for their R&D investments will still be down from April 1 compared to before. In total, the government said some 20,000 startups will benefit from the R&D program overall, but only around 11,000 will qualify for this new additional tranche: 1,000 from the pharmaceutical industry and life sciences; 4,000 from computer programming, consulting and “related activities”, such as AI; and around 6,000 companies in other segments such as manufacturing.

Mark Smithpartner at Ayminga consultancy that helps businesses secure government funding for R&D, says today’s announcement is a tacit acknowledgment by the government of its decision last year to cut tax relief for all SMEs” undermines its ambition to make Britain the next Silicon Valley”, although the latter remedy is somewhat limited.

“The government’s new 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 that the Chancellor has followed seems sensible and clear, with 40% of spending being a simple figure and target for others. However, it is much more targeted and therefore less accessible. Forty percent of R&D expenditure is very high, so only a very small portion of UK businesses will qualify. »

In addition to this, it is not entirely clear how the new legislation will be applied and to which specific disciplines, although it has identified broader industries.

“While its definition of ‘research-intensive SMEs’ is clear, we don’t know which companies and activities will qualify,” Smith continued. “It would be great to see green innovation integrated into this. It was a little disappointing not to hear more about funding linked to R&D in environmental technologies, where the UK could be a world leader. advancing the sustainable transition, specific tax incentives should be considered around green R & D. If they can include this in the definitions, it could give a boost to our innovation and net zero goals.

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