Spring Budget: Startup R&D tax credit changes slammed as ‘short-sighted’

Spring budget 2023 Jeremy Hunt leaves Downing Street to unveil a partial reversal of R&D tax credit cuts Image credit: Simon Dawson / No 10 Downing Street

Chancellor Jeremy Hunt has announced a partial reversal to R&D tax credit cuts in the Spring Budget after facing months of pressure from startup advocacy groups.

Startups had warned that the cuts, first announced by Hunt last November in the Autumn Statement, would hinder growth for early-stage and research-intensive tech companies.

The measures were originally planned to kick in from 1 April. They would have reduced the SME R&D deduction rate from 130% to 86%, while the surrenderable losses rate was set to drop from 14.5% to 10%.

According to auditor BDO, this meant support for loss-making companies would have dropped from an effective 33.4% subsidy to an 18.6% subsidy.

One study by Coadec, a policy voice for UK startups, found that the R&D change could see companies on average worse off by £100,000.

The partial reversal announced in today’s budget means that eligible companies – those spending over 40% of their money on research and development – will now be able to claim £27 back from the Treasury for every £100 they spend on R&D costs, a 27% rate.

“This is less than before but more than we had in the autumn,” said Dom Hallas, executive director of Coadec, which has organised open letters calling for Hunt to scrap the R&D tax changes.

While Hunt had earned goodwill from the UK’s startup ecosystem following his role in preventing the collapse of Silicon Valley Bank UK, he now faces backlash for not fully reversing the R&D tax credit cuts.

Jack O’Meara, founder and CEO of Ochre Bio, a London biotech startup developing RNA therapies for liver disease, said the “budget is giving with one hand and taking away with the other”.

His company, which has raised $30m in funding, has three research labs across the world.

“The enhanced R&D tax credits announced today – a partial reversal to the cuts announced in the Autumn – are an encouraging sign that the government is taking the UK life sciences industry seriously, however, they do not go far enough,” he said.

‘An act of appeasement, not progress’

Hunt has frequently said he wants to make the UK the “world’s next Silicon Valley” and a “science and tech superpower”.

However, industry stakeholders have questioned how cutting R&D tax credits – part of a move by the Treasury aimed at combatting fraudulent claims – will support Hunt’s UK tech vision.

Russ Shaw CBE, founder of Tech London Advocates and Global Tech Advocates, said the R&D tax rebates were “short-sighted” and will “simply not suffice”.

He added: “R&D is the backbone of innovation and companies working on breakthrough technologies need more support – not less – if the government is serious about a tech-driven recovery for the nation.”

Sarah Barber, CEO of early-stage investor Jenson Funding Partners, said the “funding gap between early and late-stage businesses is simply too large”.

She said that “while there was something of a U-turn” on the R&D tax credit scheme cuts, it “feels like an act of appeasement and compromise rather than progress”.

Barber added: “This will have a significant impact on early-stage tech businesses and Britain’s research capabilities, especially those that cannot devote 40% of their total expenditure to R&D investment.”

Andrew Bennett, policy principal at Form Ventures, which invests in and advises startups in regulated markets, said that “overall £2bn is still due to be cut from R&D support for startups and small businesses over the next five years”.

He said this was “in part” because some “R&D-intensive companies may fall out of this extra support as they scale and their percentage spend on R&D drops below the threshold”.

Bennett added that an alternative approach would be to add eligibility criteria for a minimum spend on R&D, instead of solely basing it on a percentage of expenditure.

The second tax relief scheme, the R&D Expenditure Credit (RDEC), is primarily aimed at larger companies. In the Autumn Statement, Hunt said the RDEC rate would increase from 13% to 20%. This remains unchanged in today’s Spring Budget.

Elsewhere in the Spring Budget, Hunt announced a full capital expensing programme for the next three years, which means firms can fully deduct spend on IT equipment and machinery from taxable profits.

“The chancellor also did his best to paint his new ‘enhanced’ R&D tax credit as a win for the UK’s innovation economy,” said Aleks Stefanovski, chief strategy officer at Currencycloud. “But in reality, it will only partially offset the damage done by his changes in last year’s Autumn Statement. The bottom line is most startups will still find it much harder to claim R&D tax credits than before this government took over”.

Read more: Spring Budget 2023 – measures affecting UK tech