Startups’ R&D tax credit cuts are a short-sighted and bad idea

By Daniel Lanyon on Friday 20 January 2023

OpinionAlternative LendingDigital BankingSavings and InvestmentCrypto

Change is coming for the UK's R&D tax credit regime and the most innovative businesses are caught in the crossfire.

Startups’ R&D tax credit cuts are a short-sighted and bad idea
Image source: Pexels/Jess Bailey Designs

Speed of execution is critical to startup success but cashflow is too. 

A helpful tailwind for UK startups’ cash flow - when they are paid on time - in recent years has been a tax credit scheme designed to encourage research and development (R&D).

The UK's tech startup ecosystem is at risk of significant damage, however, due to changes to the R&D tax credit scheme raised in Jeremy Hunt’s November budget. 

This is shortsighted and should be scrapped.

The proposed changes will make the R&D tax credit scheme for Small and Medium Enterprises (SMEs) less generous while increasing the benefits for larger businesses.

This means a reduction from being able to claim 33 per cent of your R&D spend as cashback to just 18.6 per cent for startups.

Well-meaning the policy might be, which was brought in at a time of spiralling fiscal spending and out-of-control inflation, now is the time to re-look at an important drive for prosperity and job creation

Tessa Clarke, Co-Founder and CEO of Olio, says the R&D tax credits scheme was “absolutely invaluable” in helping the food waste app navigate its ‘zero to one’ phase. 

“Cuts to the R&D tax credits scheme would mark an extremely worrying reversal of the UK’s ambition to be a leader in digital innovation,” she said.

According to a new survey by the Coalition for a Digital Economy (Coadec), UK startups will lose between 30 per cent and 40 per cent of their current savings from the scheme due to the changes. 

The average figure that startups expect to lose is over £100,000, which could have a significant impact on their ability to invest in new technologies and grow their businesses.

“This data is clear - startups are terrified of the changes planned for April this year. If the

Government goes ahead it will crush some companies and damage many others. The outcome would leave the jobs and innovation engine of the British economy severely damaged for years to come. We hope the Government reconsiders," said Dom Hallas, executive director of Coadec.

The survey polled over 250 UK startup founders, shows that the proposed changes to the R&D tax credit scheme would have a devastating impact on the country's most innovative businesses.

Opinion was fairly decisive with 97 per cent of respondents agreeing with the statement: 

“I expect the cuts to severely impact my startup”, and 89 per cent of respondents agreed with the statement "If the cuts go ahead as planned I believe the UK will be made significantly less attractive to startups and investors".

Concern across the UK's tech ecosystem is understandable, where many startup founders fear that the cuts will severely impact their businesses and make the UK less attractive to startups and investors.

While the cut may save money in the short, long term tax receipts are dependent on salaries and inward investment, both of which are boosted by an economy that is both ‘startup friendly’ as well as seen to be so.

It is also understandable that any government is looking to cut costs or at least have efficiency savings given the dire economic environment. But, will cutting the R&D scheme actually save the UK government cash beyond 2023? 

The UK's tech startups are vital to the country's economic growth and competitiveness, and any changes to the R&D tax credit scheme must take into account the UK’s established but not fully complete reputation as an innovation hub. 

Funding volumes are already under pressure from VC investors pausing during the current economic malaise. 

Those businesses caught in the “crossfire of well-meaning but short-sighted changes to the R&D tax credit regime” need more help not less. 

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