Over a dozen UK-based tech startups have called for the government to rethink its approach to R&D tax credits, which has been claimed to stifle innovation
Following the reduction of tax rebates available to SMEs and increase in credits for larger companies, announced in Chancellor Jeremy Hunt’s Autumn Statement, startups including genomic medicine startup Ochre Bio and autonomous driving provider Wayve have lobbied against the cuts, reported the Financial Times.
The governmental measures, which come into effect on the 1st April, were made with the aim of mitigating fraudulent claims, but the 13-company consortium argues that cuts to R&D tax credits will “punish” innovation efforts across the country.
The group of companies in question sent a letter to Prime Minister Rishi Sunak on Friday, claiming that the credit cuts will cause a reduction in funding totalling £1bn.
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Financial effects on startups
Support for early-stage tech companies dealing in areas such as AI, biotech and climate tech is set to be curtailed at a time of venture capital funding slowdown, caused in parts by inflation concerns, rising interest rates and the conflict in Ukraine.
“We’ve seen really strong rhetoric from the government being pro-innovation, pushing the UK to be one of the best environments if you want to come and start a company,” said Wayve CEO Alex Kendall.
“[The credit reduction] feels like a U-turn on that rhetoric and that strategy, which is disappointing to see.”
With the majority of funding received since 2017, totalling $260m, going towards R&D operations, the rebate the company will be entitled to under the new governmental plans will drop from 33 per cent on R&D costs, to 19 per cent.
According to Kendall, this has left Wayve with “a really rushed, unexpected increase in tax liability”.
Meanwhile, Ochre Bio, which focuses on developing new treatments for liver diseases, received £1m in tax credits, and following a tripling of operations, the startup was reportedly projected to receive around £3m in 2023 and 2024.
But according to CEO Jack O’Meara, this is set to halve under the new measures, which O’Meara said “will force us to go out to raise money prematurely”.
He added: “With the VC markets where they are today, a premature pitch is extremely risky for a nascent company.”
The government’s response
In recent weeks, meetings held between tech startups and government ministers including Chancellor of the Duchy of Lancaster Oliver Dowden, and chief financial secretary to the Treasury Victoria Atkins.
Dowden responded in a subsequent letter stating that government would look at “how best to ensure high-quality Research & Development intensive SMEs are supported”.
According to projections from the Office for Budget Responsibility, changes to R&D tax credits would save the Treasury, £1.3bn a year by 2027-2028, with Atkins recently telling the House of Commons that between £200m and £300m of this would be a reduction in fraud and error.
This would mean, according to Atkins, that over £1bn would be cut for genuine claims.
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