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Budget 2023: startups extra funding via R&D relief and pensions

UK government aims to promote increased investment in research and development-intensive startups through tax relief measures, relaxed pension rules, and new investment zones

UK chancellor Jeremy Hunt has announced new funding avenues for research and development (R&D) intensive businesses as part of the Spring 2023 Budget, and has committed to unlocking defined contribution pensions to further increase startup investment.  

From 1 April 2023, the government will introduce an increased rate of relief for loss-making R&D-intensive small and medium-sized enterprises (SMEs), with eligible companies able to receive £27 for every £100 of R&D investment from HMRC.

SMEs for which R&D constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure, as set out in a technical note published alongside the Budget.

The government has also allocated £100m funding for the Innovation Accelerators programme to 26 transformative R&D projects, which it claimed will accelerate the growth of three “high-potential innovation clusters” and support its Levelling Up agenda, although details of these projects are yet to be announced.

R&D tax relief was previously expanded in the government’s 2022 Spring Budget to include all cloud computing costs associated with R&D, including storage, all “mathematics”-related firms working in nascent sectors such as artificial intelligence (AI), quantum and robotics.

The Autumn 2022 Budget – which Hunt vowed will help to make the UK the next Silicon Valley – also saw the government commit to increasing overall R&D spend to £20bn a year by 2025.

To further open up the investment available to startups and help “develop the next generation of globally competitive companies that grow and list in the UK”, the government added that it would be “critical to unlock defined contribution (DC) pension fund investment into the UK’s innovative firms”.

To do so, the government said it will extend the British Patient Capital programme for a further 10 years until 2033, and accelerate the transfer of the £364bn Local Government Pension Scheme assets into pools “to support increased investment in innovative companies and other productive assets”.

Venture capitalists investing in UK enterprises have long called for the government to open up pension funds to boost tech investment.

In combination with the R&D changes, the UK government claims this will provide at least £3bn in investment, although it does not say over what time frame.

These measures will be accompanied by the launch of a refocused Investment Zones programme, which aims to catalyse 12 “high-potential knowledge-intensive” growth clusters across the UK.

“Each cluster will drive growth in key future sectors and bring investment to the local area. Each English Investment Zone will have access to interventions worth £80m over five years, including tax reliefs and grant funding,” it said, adding that further details will be announced in due course.

Budget reactions

Andrew Roughan, CEO of startup hub Plexal, said the Budget announcements “underscore this government’s commitment to developing a world-class tech and innovation economy, and driving growth through the development of our most innovative businesses and technologies.

“It was encouraging to hear the government’s focus on the growth of the UK’s enterprise and innovation economy, through the announcements of a full capital expensing programme over the next three years, as well as the reversal of cuts to R&D tax credits – both of which are certain to contribute to the growth of the sector by supporting startups and SMEs.”

He added that the extra support for AI with the introduction of an “AI sandbox” would also be key to ensuring the UK stays head of the curve in developing and scaling emerging technologies.

Gavin Poole, CEO of innovation campus Here East, welcomed the proposals for 12 new investment zones: “This, alongside the announcement to devolve power and capital to local communities and give them autonomy over their economic destiny, is a salient measure,” he said, adding the “wealth of positive assurances” from the government shows it is serious about supporting UK tech.

“It is evident this government understands the critical role these industries play in our economy – we now see how words translate into action. There are challenges ahead – the SVB saga over the weekend demonstrates just how precarious the position of many of our budding tech startups can be – and there must be a solid foundation in place to protect these critical elements of the economy.”

National accountancy group UHY Hacker Young, however, estimated the Budget’s R&D tax relief measures would give the tech, manufacturing and life sciences industries an extra £1.8bn in support over the next five years.

“It’s great to see targeted help for some of the most innovative businesses in vital sectors of the UK economy,” said Kevin Edwards, partner and R&D tax credit specialist at UHY. “This help with R&D spending will be welcomed by a lot of loss-making high-tech SMEs – they have fought very hard to get this extra assistance from the Treasury.”

However, Mark Smith, a partner at Ayming focused on R&D incentives and grants, noted that because the R&D is more targeted, it is not as accessible.

“40% of spend on R&D is very high, so only a very small portion of UK businesses will be eligible. The government estimates about 8,000 businesses could benefit, which is about 10% of current claimants,” he said. “All other small businesses that don’t meet the threshold will still see a cliff edge in funding, which will most certainly have an impact on the UK’s innovation as a result.”

He added that the government’s new rules around capital expenditure will also help to stimulate innovation: “These will allow companies to reduce their tax burden by investing in assets that are then used for R&D activity. It is less direct, but ultimately allows businesses to invest more.”

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