R&D Tax Reform: Problems ahead for SMEs?

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Expert Opinion
March 2, 2023

The UK’s R&D tax scheme was first introduced at the turn of the millennium and has been a strong driver of innovation across the British economy for over 20 years.

Ayming’s inaugural UK Innovation Barometer examines the current state of the UK’s innovation landscape, as well as considering the various reforms that have the potential to influence businesses operating across the technology, manufacturing, food & beverage, construction, financial services, and pharmaceutical industries.

In November 2022, Ayming conducted a survey of 200 senior innovation, finance, tax, and CEOs/MDs in the UK. Survey respondents are all at CXO, director or head of department level, and evenly split across SMEs (companies with 250 employees or fewer) and larger companies.

When asked if they believe whether the expansion of the current scope of credits is important, nearly a third of respondents answered that it was absolutely critical, a higher proportion than across any of the other proposed reforms. A further 44 per cent defined it as very important, meaning that more than three quarters of respondents believe the expansion of the current system would be valuable.

This is particularly driven by the manufacturing sector, where almost half – 47 per cent – of respondents argued that this action was absolutely critical.

Changes badly affect manufacturing

Benjamin Craig, Associate Director of R&D Tax Incentives at Ayming UK questions whether this has something to do with earlier reforms made in 2015, stating “We know the manufacturing sector was badly hit by changes made to the scheme regarding what materials could be included in a claim, which resulted in the value of their applications dropping quite significantly. In spite of wider support for capital intensive industries like manufacturing, it would be apt to see the hire of plant machinery, equipment and premises included in new reforms to the programme, as these are all important components of the overall R&D process. The government needs a coordinated approach to spurring innovation, productivity and sustainability progress in the manufacturing sector.”

Seventy-six per cent of SME respondents identified the expansion of the scope of R&D tax credits as at least very important, but the Chancellor’s decision to curtail the scheme for SMEs leaves the future for these firms uncertain. And ambiguity over reforms that reduce the value of the scheme for small businesses will have an immediate impact on the output of innovation.

R&D tax reform could signal instability to some

Mark Smith, Partner of R&D Incentives and Grants at Ayming UK points out that “The reason the SME programme has had sustained success is due to the perceived stability of it until now. Whereas previously it was a nice bonus, now you see it discussed at board level and businesses have embraced and embedded the process into annual plans. It’s been a reliable source of funding that SMEs wanted to see expanded, not axed”.

He continues, “Confidence in the programme has been steadily building for years, allowing businesses to incorporate the funding into long-term plans and we’ve noticed it starting to influence R&D decisions for our clients in a substantial way. You can’t turn that kind of confidence off and on again like a tap. Any ambiguity around it could have serious ramifications for its credibility going forward”.

To discover the insights in full, click the button to download Ayming’s UK Innovation Barometer.

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