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How the UK government can support SMEs

How the UK government can support SMEs

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Despite their contribution to the innovation landscape, tech-savvy and innovative small firms have seen more and more cuts to government support in the past year. Tina McKenzie, Policy Chair, Federation of Small Businesses, explains how the government in the UK can do more to support SMEs and help them innovate and introduce new products.

Small businesses are the lifeblood of our economy – not only providing jobs but also driving innovation and tech development that improves our daily lives, even when they are faced with scarcer government support and have fewer resources than their large incumbents.

A new report by the Federation of Small Businesses (FSB) – titled The Tech Tonic – found that across all sectors, seven in ten (69%) small firms have introduced a form of innovation in the last three years. This includes the development of an entirely new product(s) to their market (25%), significantly improved existing or new product(s) (38%) and improving their internal processes for a better staff and customer experience (25%).

Small firms with new and improved products say increased turnover or profit is the main motivation for introducing these changes, followed by their desire to diversify their business. Those that have introduced new or enhanced staff and customer-facing processes are mostly motivated by the need to increase business resilience and automate.

The average cost of introducing any types of innovation over a three-year period amounts to over £27,000 for a small firm, and the changes on average increase revenue by 14.8%.
When it comes to tech adoption, the vast majority (83%) of small firms now have a company website, compared to only 51% in 2018. There has also been a significant increase in the number of companies using cloud storage, up from one-third (33%) in 2018 to two-thirds (67%).

Declining government support

Despite their contribution to the innovation landscape, tech-savvy and innovative small firms have seen more and more cuts to the government support in the past year, from scrapping the Help to Grow: Digital Scheme to downscaling support for Growth Hubs.

April’s cuts to the R&D Tax Relief Scheme for SMEs – a scheme that had been very successful in encouraging start-ups and driving innovation previously – have also impacted small firms’ ability to invest in innovation.

FSB research shows 64% of small firms which applied for R&D tax relief in the last three years have improved cashflow for their business, while over a half (55%) increased their investment in R&D.

Two-fifths have used the tax credits to increase their investment in future projects, and more than a third of recipients say it has led them to undertaking projects that would not have happened otherwise.

Government cuts to R&D tax relief, even for R&D intensive firms, are self-defeating, especially when countries such as France and the US are going in the opposite direction.

We have also been hearing first-hand from small businesses about HMRC’s unnecessarily harsh clampdown on R&D tax relief recipients, forcing them to spend hours or even days to dig up evidence for approved claims dated back not only months but also years.

Clamping down on genuine abuses of the system is one thing, but HMRC causing needless stress and anxiety for firms which have claimed in good faith often on the advice of expert intermediaries is another. There needs to be a review on HMRC’s compliance activities and, while ensuring that it accepts genuine cases for relief, it should not be heavy-handed, aggressive or inconsistent.

An entrepreneur-led approach

Close to a third (28%) of small firms want help with implementing new ideas or modernising their business. More than a quarter (26%) want better information and advice, and a similar proportion (24%) say they need more suitably skilled staff.

In terms of financial incentives, half of the respondents say additional government grants would encourage them to innovate, and 46% say extra tax relief would do so.

To move our society from low or no economic growth, we need to see more businesses free and empowered to experiment and try new ways of working, as well as a more ambitious pathway for start-ups to shake up the marketplace and change the world.

To achieve this, FSB put forward a list of recommendations to government, including:

• Spend the equivalent of at least 10% of the overall Research and Development budget on the diffusion and adoption of innovation. R&D and the invention of new products only has an economic impact if they are widely used. If the point of spending public money on R&D is to boost UK productivity, there needs to be recognition of the importance of small businesses taking up new or improved products or processes. The UK government has brought forward different support schemes to enable more companies to adopt innovation, but these have been poorly funded and short-lived. Similarly, business support continues to be poorly funded and constantly changing. Only through significant commitment can business support schemes be a success.

• Set itself a target that half of all direct government BERD funding should be directed to SMEs. It is important that small innovative businesses also benefit from this support. The OECD highlights that a number of countries, such as Australia, Estonia, Ireland and Luxembourg, have introduced direct SME-targeted funding, which could provide good examples to consider. As they are always over-subscribed, expansion of Innovate UK’s Smart Grants should also be considered.

• Introduce a ‘modernisation and diversification tax relief scheme’ based on R&D tax relief. This scheme would provide small businesses tax relief for those who have invested in significantly improving products or processes. R&D tax relief is currently focused on firms developing new products through science. This is a narrow way to view innovation; improving products and processes brings similar financial benefits to firm. A new scheme, with the tax relief set slightly lower than the current R&D tax relief, would encourage more firms to improve their products and processes.
An inclusive, entrepreneur-led approach is key to incentivising small business owners to take risks and develop new solutions. Policymakers need to have a broader understanding of how tech adoption and innovation is not only confined to big firms.

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