Whatever happens at the Autumn Statement, the chancellor must fix R&D tax credits

Jeremy Hunt chancellor has been called on to fix R&D tax credits for startups Image credit: Kirsty O'Connor/HM Treasury.

A day away from Jeremy Hunt’s Autumn Statement, we’ve heard a lot of noise about what to expect for the tech ecosystem.

In typical fashion, the Treasury has been slowly but surely trailing large chunks of the speech. That means we can expect to hear some of the following from the chancellor on Wednesday: ISA reform, new funding for quantum computing, the publication of the spinouts review, a new Kauffman fellows-type scheme for investors in the UK, action on pensions, and lots more.

All potentially really exciting stuff. From the perspective of tech startups though, it’s alarming that there’s one topic we haven’t heard about at all – but must. R&D tax credits.

As any founder knows, R&D tax credits are a key driver of startup innovation. Startups we survey say they are critical to their early-stage survival. But the scheme is in chaos.

In 2022, the government announced it would cut R&D tax credits available to startups with limited warning or consultation. The justification was fraud. But you don’t stop fraudsters by cutting everyone’s money, you stop it by finding fraudsters.

Those cuts are hurting. Startups have told us that under current plans they could see an average drop of £100,000 per year. There are ongoing fears of high quality, technical jobs being lost with 73% of startups surveyed saying they fear being unable to pay staff.

Now, the government is planning on merging the RDEC and SME schemes (the ones for big and small companies, respectively) together. Simplifying the schemes is a good idea – the problem is that it’s coming with further planned cuts for startups.

If changes proceed as planned (and as currently budgeted for), the effective rate for R&D tax credits for a venture-backed tech startup goes from 18.6p in the £ to 15p. Another nearly 20% cut.

This must be addressed.

Thankfully, there are a few clear ways to fix the scheme. In March, as a response to the outcry at the initial cuts, the government created a new enhanced scheme to allow the most innovative businesses to access a credit more akin to the plan before the significant cuts.

This was a great idea and welcomed by us in March – but the scheme doesn’t give enough startups access. It’s designed around ‘R&D intensity’ aka the percentage of your costs you spend on R&D, which declines even if you’re doing more R&D as you scale and build other parts of your business.

So it’s fine for folks like pharma – but it doesn’t work for tech companies who iterate as they grow. Lowering this threshold would allow more scaling businesses to access the extra support they need.

Sclerotic administration

But letting more startups access the policy they need won’t matter unless the scheme is run effectively. And the sclerotic administration of one of the government’s flagship industrial policies has left startups in limbo.

Every founder knows someone with a horror story. Credits clawed back months later with little justification. Shifting sands on what is allowable or not. Lengthy delays. PhD students having to explain and re-explain their innovation to officials to no end. It simply isn’t working.

All the while, HMRC have raised their guess-estimates of error and fraud in the scheme to nearly 25% and the challenges in rooting out fraud remain.

This isn’t good enough for a scheme that is one of the cornerstones of the UK’s startup ecosystem. We can and must do better.

At the Startup Coalition, we published a plan last week to boost the scheme for startups as well as crack down on fraud and bureaucracy at the same time. We sincerely hope the chancellor was listening.

Whatever else is announced on Wednesday, if we don’t get action on tax credits the silence won’t just be deafening – it could be a death sentence for many startups.

Dom Hallas is the executive director of the Startup Coalition