Finance · 25 November 2015

Autumn Statement 2015: Introduction of R&D loans a concern for small businesses

George Osborne combined his Autumn Statement with the first Spending Review since 2010
George Osborne combined his Autumn Statement with the first Spending Review since 2010

One of the more worrying announcements for small businesses within George Osborne’s combined Autumn Statement and Spending Review was the government’s plan to introduce new finance products to support companies with R&D, replacing some existing grants from UK innovation agency Innovate UK.

It said they will reach £165m per year by 2019-2020, maintaining the total Innovate UK support in cash terms, but there is concern about the incoming R&D loans. Some have warned that unless payment is contingent on income, the change could stifle startup innovation.

The department for business had been under pressure to find 20 per cent of savings in its £18bn budget and with £500m worth of grants distributed by Innovate UK, it had looked a potential target. The announcement will see grants turned into loans, moving the costs off the government’s balance sheet and onto those of the recipient firms in the form of debt finance.

Under the current R&D grant system estimates show private rates of return for R&D investment of around 30 per cent, which Alma Consulting’s Caroline Elston-Giroud said was “a key driver for building a strong foundation for economic security”.

Elston-Giroud, who is the European grants manager at the company, said: “Today’s announcement threatens to strangle the significant role R&D can play in helping cutting-edge businesses improve productivity and gain competitive advantage – both here in the UK and across the globe.”

Many firms lack the upfront capital to invest as much as they would like into R&D so can’t fully benefit from the innovation pound. Elston-Giroud feels swapping R&D grants for interest-paying loans will only exacerbate the issue “by placing a huge amount of risk to the user, particularly those businesses that need vital support in the early stages of their R&D programmes”.

Questions small businesses want answered include how will loans be tracked correctly in accounting terms regarding R&D tax relief and at what date will it be reimbursed back to Innovate UK?

The argument for the state to charge for its support may make sense – many firms have been built on intellectual property funded by public money. Yet while research grants are free, they have often secured private investment beyond the requirement to match funding and for early-stage businesses, this funding also works as seed capital and a positive sign to commercial investors.

Paul Hardaker, the chief executive of the Institute of Physics, said: “To grow our economy and create jobs, the UK must be competitive and that means investing in science and bringing that science to market.”

Osborne’s announcement that the £4.7bn science budget would be protected in real-terms over this parliament was, he said, a good sign that the government was “committed to investing in science and ensuring that we maximise the potential economic and societal gains from doing so in the future”.

The UK currently attracts more R&D investment from abroad than China, Japan, Russia and Canada combined, but small firms worry this change from grants to loans will be a significant hindrance to their ambitions, with a knock-on effect on the UK’s R&D outlook.

Not everyone was critical of the development though. Manufacturing organisation EEF’s chief economist, Lee Hopley, said: “The switch away from some grants may well prove to be a canny move to maintain the number of companies that can be aided with government support and by providing an escalator of funding options.”

She did warn though, that this needed to “go hand in hand with access to the expertise and partnering opportunities that were part and parcel of previous schemes”.

The announcement follows recent news that the government was trying to make it easier for small firms investing in R&D to claim tax relief. The two-year plan being introduced aims to increase take-up of tax relief through raising awareness of it among small firms and making it easier for them to reply.

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ABOUT THE EXPERT

Rebecca is a reporter for Business Advice. Prior to this, she worked with a range of tech, advertising, media and digital clients at Propeller PR and did freelance work for The Telegraph.

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