As the new Government is no doubt well aware, things can’t only get better. They can get worse. Labour didn’t even manage a minimoon let alone a honeymoon before the realities of governing became manifest.
For entrepreneurs, it’s not just the potential cuts to Entrepreneurs’ Relief (well, what’s left of it), or tax rises more broadly, but a whole plethora of hangovers from previous governments that still need fixing.
One of those, as reported in Sifted, is that the R&D tax credits regime is still a mess. They have spoken to five companies that are close to collapsing after being asked to repay tax rebates.
It’s worth reading in full, but one case stands out. The startup received a tax rebate for the 2022 financial year, but, a few months later, received a letter from HMRC saying the money had been sent in error and that it no longer qualified for the five-figure sum.
HMRC isn’t backing down, even though the company won an Innovate UK grant during the same period.
This is just the tip of a much larger iceberg.
Oli Kicks, investor at Concept Ventures, told Sifted that “no one knows what’s going on or what the process looks like. Our general view is do not factor [R&D tax credits] into the budget in its current format, as it’s a completely unreliable means to extend runway or de-risk cash flow. Some have decided that the current regime is simply too complex and costly to go through the process of making a claim.”
I’ve heard of many entrepreneurs running businesses that had previously claimed R&D tax credits deciding not to claim this year due to the increased risk and uncertainty. Their fear is that this could alert HMRC to previous years’ claims. Critically, they think their businesses should qualify for them, but they just don’t trust HMRC to make the right decision.
In addition, delays have created a market for loans. For 2020-21, we calculated this to be costing UK startups and small businesses in the order of £130 million.
This isn’t an easy nut to crack, but as we argued in Backing Breakthrough Businesses, it’s something that the new Government should prioritise.
Show Us The Money
Our friends at Tussell have crunched their procurement data, and there is plenty of room for improvement in the long-standing ambition to procure more from innovative small businesses.
Overall, public sector direct procurement spending with SMEs has grown each year over the last six, from £22.4bn in 2018 to £39.7bn in 2023. However, direct SME spending as a proportion of wider public sector procurement spending was only 20% in 2023, the same as the previous year (20%), and only slightly up on 2018 (18%).
Another question is how meaningful the government’s engagement with innovators actually is. Take defence procurement. Analysis of defence purchasing data from Air Street Capital shows that the largest awards to SMEs tend to be for routine activity, such as estate upgrades and equipment maintenance, rather than next-generation warfare capabilities.
To its credit, the previous Government recognised the need for change, with the new regime – following the passing of the Procurement Act 2023 – starting in October. But the new Government will need to make sure this is embedded across the public sector, which will be no mean feat.
Up Our Street
The Federation of Small Businesses has put out a chunky new report to help support and transform our high streets.
It’s impossible to write about high streets without mentioning the elephant on it: business rates. Among other things, the FSB recommends the government increases the frequency of business rates revaluations to take place annually, instead of the current three-year cycle. This would ensure that business rates more accurately reflect current market conditions and economic factors.
The FSB also recommends that the Valuation Office Agency and the Ministry of Housing, Communities and Local Government implement a national system which connects VOA and local government data to regularly and automatically contact high street businesses, proactively informing them of all business rate reliefs they may be entitled to.
Both would be significant steps forward.
In our paper with Enterprise Nation from last year we go a step further. We suggest scrapping and replacing the business rates system with a tax on the underlying land values. We also called for local authorities to have more responsibility over Business Rates reliefs and exemptions for small businesses, coworking spaces and charities, so that they could better respond to conditions on the ground.
Perhaps something for the Autumn Budget?
Message from our Partner
Beauhurst and Barclays recently partnered to publish Unlocking Investment – Insights into high-growth companies report, which was funded by the UK Government. This report provides an annual review of investment trends into UK based high-growth companies, and follows on from our previously published Unlocking Investment: Trends for high-growth companies, H1 2023 insight. Between January and May 2024, equity investment into high-growth UK companies amounted to £6.53bn via 2,423 deals. High-growth companies within the UK secured higher value deals in 2023, than those previously acquired in 2019 and 2020. Overall, equity investment into these organisations totalled £18.0bn across 2023.
If you would like to discuss how Beauhurst can use its proprietary data to help you develop research in order to understand and reach high-growth companies and sectors, contact their Managing Director of Research & Consultancy Henry Whorwood.