The UK will become an “innovation wasteland” if the government pushes ahead with plans to slash research and development (R&D) tax relief, the Federation of Small Businesses (FSB) has warned.
The UK’s largest business group urged ministers today to reverse plans to gut the R&D tax relief scheme, announced by Chancellor Jeremy Hunt in November, claiming that the plans would spark a mass withdrawal of the UK’s small firms from innovation projects.
The Treasury hit back at criticism saying it recognises R&D’s “hugely important” role while inciting the tax relief review will “ensure taxpayer’s money is spent as effectively as possible”.
Start-ups and smaller firms reaped the benefits of the UK’s R&D system which offered rebates on innovation spending. However, Hunt announced plans to scale back the rebate to reduce fraud while offering more credits to bigger companies.
Research from the FSB today found that 64 per cent of of the firms to have earned the tax credits in the last three years would now rein in their innovation investment in light of the changes, equivalent to 50,000 small firms.
A quarter of firms surveyed by the FSB said they would refocus their efforts on “lower-risk” projects in light of the move while 12 per cent have frozen recruitment and bgun laying off staff as a result of the changes.
FSB chief Martin McTague said the findings underscored the importance of the tax regime and warned the Treasury it was approaching “deadline day” to decide on whether to reverse the cut.
“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,” he said in a statement.
“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.”
The warnings come as Hunt gears up to deliver his first full budget in March, widely expected to be a placeholder budget with few major tax cuts.
McTague said there was still time for the Chancellor to deliver “a great budget for growth” but urged him to be “less credulous when presented with bureaucratic certainty that only big firms can deliver R&D.”
Warnings from the FSB come after reports that some start-ups had begun to shun the UK and expand overseas in light of the tax changes.
Twelve top UK startups including autonomous driving firm Wayve and artificial meat-maker Hoxton Farms lobbied Rishi Sunak in the wake of Hunt’s November announcement, warning that the changes amounted to a £1bn funding cut for smaller innovation companies.
When approached by City A.M. a Treasury spokesperson said: “The government recognises the hugely important role that R&D and innovation play for the economy and society. At Autumn Statement, the government recommitted to increasing R&D spending to £20bn per year by 2024/25 – a cash increase of 30 per cent from 2021/22 – the highest level of R&D this country has ever seen.
“Our ongoing R&D tax reliefs review will ensure taxpayer’s money is spent as effectively as possible while improving the competitiveness of the Research and Development Expenditure Credit (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”.