In April, the SME tax credit scheme — though still thoroughly worthwhile — isn’t going to be as generous as it has been.
The Chancellor announced this change in the Autumn Statement in November.
We’ve always campaigned on behalf of SMEs for a generous scheme that recognises the contribution they make and we remain opposed to anything that means they aren’t as well rewarded.
Casual observers may have got the impression from our politicians recently that SMEs aren’t, in fact, that important to UK innovation. This couldn’t be further from the truth — but don’t take our word for it!
Right on cue, SMEs have underlined the contribution they make by putting their stamp all over some of the most crucial R&D taking place in the UK today.
Catax analysis1 of the grants awarded by Innovate UK, the UK’s innovation agency, to projects with a 2022 start date shows that the share of awards claimed by SMEs has ballooned in the past year.
Compared with those given to larger companies, the SME share has jumped nearly a quarter in a year.
The proportion awarded to SMEs rose to 88.2% — up 16.4 percentage points from 71.8% in 2021, itself little changed on 2020.
For projects begun in 2022, SMEs were awarded a total of £333,779,450, while larger companies were awarded a total of £44,829,828. For 2021, SMEs secured £452,042,158 while larger firms were awarded £177,159,659.
This is evidence, if any were needed, that important innovation isn’t the sole preserve of large companies. Innovate UK clearly doesn’t think so.
If we, as a country, begin to undervalue the work of SMEs, that bodes ill for the future. Many SMEs are the larger companies of tomorrow — they will grow or be swallowed up by larger rivals.
Innovation — taking risks with time and money to create exportable and lucrative new products and services — remains key to the future success of the UK. Now isn’t the time to be removing incentives to innovation.
What’s changing in April 2023?
SMEs are currently allowed to deduct an extra 130% of qualifying costs from their profits but this will reduce to 86% (plus the normal 100% deduction) for expenditure incurred from 1st April 2023. For loss-making companies, SMEs will be entitled to a tax credit worth up to 10% of the total surrenderable loss, instead of the current 14.5%. Conversely, the Research & Development Expenditure Credit (RDEC) scheme for larger companies is being made more generous.
Laura O’Neill, Grants Manager at innovation funding specialist Catax, said:
“These results show very clearly how smaller companies are fundamentally important to the drive for innovation taking place in the UK. The vast majority of innovation grant money awarded to businesses is won not by large corporations but by SMEs.
“However the contribution SMEs make to the UK economy is at serious risk of being overlooked. Many of them are the larger companies of tomorrow, whose journey to success and growth is often obscured by the inevitable interest of other companies and subsequent acquisition.”
1Innovate UK data correct as of Nov 15 2022. Years defined by project start date. Innovate UK also awards grants to charities, public sector organisations, academic institutions, Public Sector Research Establishments (PSREs), Research & Technology Organisations (RTOs) and catapults. These were excluded for the purposes of the study.