The Federation of Small Businesses has published “The Tech Tonic” report, which looks at innovation across the UK. The FSB believes and urges the government to further incentivise the millions of small businesses to invest in technology and innovation. The report indicates that small businesses have less access to government funding, when compared to corporates. There is a greater urgency for such investment following the government cuts in the R&D Tax Relief scheme.
The repayment element of R&D tax credits for SMEs is being cut from 14.5 to 10% from 1 April 2023. Whilst the additional tax deduction for R&D costs for SMEs is also being cut – from 130% to 86%. (Source Pinsent Masons).
The key findings from the report include:
- Nearly 7 in 10 SMBs have introduced innovative changes in the last three years
- SMEs that introduced innovation have seen a 14.8% increase in revenues
- 76% of female small business owners have innovated their business in the last three years compared to 66% of their male counterparts
- SMB owners spent 14% of their time on innovation in the last 12 months
- 30% of small businesses identify financial cost as a top barrier to improving their products
FSB Policy Chair Tina McKenzie said, “Our report tells the story of how tech adoption and innovation is not confined to big businesses and the tech industry, and how millions of small firms are bringing in new ideas and changes to their business when times are tough, to drive productivity.
“We need a set of new policies and decisions to encourage new starters to innovate, and small businesses to take their new ideas and changes to the next level. To do that, there needs to be an inclusive, entrepreneur-led approach that incentivises small business owners to take risks and develop new solutions from the bottom up.”
What is in The Tech Tonic report?
This is a substantial report at 82 pages. The findings are based on a survey of 1,035 small businesses between 18 January 2023 and 3 February 2023. There were also several focus groups conducted over Zoom that added a qualitative element to the research.
The report is divided into several sections with a foreword by McKenzie. The executive summary details the seven substantive parts of the report. However, before these, the report summarises the findings from the survey. It then goes on to list substantial recommendations for the UK government and several departments. This detailed and comprehensive list champions the needs of SMBs highlighted within the report. Considerable, though, has gone into this list with practical and economic suggestions that the FSB wants the government to take note of.
The recommendations to the government included:
- Spending the equivalent of at least 10% of the overall Research and Development budget on the diffusion and adoption of innovation
- Setting itself a target that at least half of all direct government R&D funding goes to SMEs
- Introducing a ‘modernisation and diversification tax relief scheme’ based on R&D tax relief. Providing small businesses tax relief for those which have invested in significantly improving products or processes
- Introducing digital audit vouchers for small businesses to enable more small firms to effectively use data and technology
- Expanding Made Smarter geographically and similar bodies should be set up for different sectors across the country – these organisations should be focused exclusively on enabling small businesses to adopt innovation and technology
- Developing an Automation Fund, providing small businesses with grant funding to automate processes where access to labour is challenging
After the recommendations, the FSB has a thought-provoking piece on policy context. The authors argue that the UK should not blindly follow the Silicon Valley model. But should note the changes the Israeli government made for its successful innovation policies. The point is that whatever innovation policy the UK government makes should find a path that matches the UK culture rather than copy the US one.
The authors state, “Instead of fixating on a Silicon Valley approach to innovation, Government should focus on providing opportunities for innovation-led firms to grow in a sustainable way, and to enable the wider business population to benefit from new ideas and technologies.”
Each section contains data insight, supporting graphs, analysis and insights from the focus groups. They end with a list of recommendations for government bodies.
Different types of innovation
Examines four types of innovation that SMBs have adopted: new products, enhanced products, manufacturing processes and services processes. The report looks at the different approaches and motivations that lead SMBs to innovate. The section ends with the relevant recommendations for the government.
Barriers and incentives
It covers the different barriers and benefits that each innovation type presents. It notes that the top four barriers to innovation are:
- Time – 40%
- Cost – 28%
- Lack of suitable skilled staff – 22%
- Unsure whether innovation is worthwhile – 22%
The importance of government grants towards innovation is significant, with 50%, the highest. Noting them as the greatest incentive, with tax reliefs second (46%). Of those SMEs not innovating, the biggest barrier is a lack of guidance and a poor understanding of the benefits of innovation. Perhaps indicating that the government and larger enterprises might help SMBs understand why innovation is important.
Research and Development
This brief but in-depth section looks at the state of R&D within the UK. It identifies reasons why the UK Government has cut funding and argues against it. It makes the case that for UK firms to scale up, R&D Tax relief must be reviewed. With France and the US increasing their rates, the UK has reduced it.
Challenges the current regulation around IP and notes that SMEs view IP regulation as a barrier to innovation rather than protection. It notes that only 15% of SMEs successfully applied for IP. The report critiques the current IP system and provides recommendations for change.
Cloud and COVID accelerated the adoption of technology by SMEs. However, the report notes that the lack of investment hinders digital transformation amongst SMEs in time, money and resources that are required.
The report has some interesting insights on the type of technology installed. With 87% having a company website and 67% using digital accounting solutions. However, with a small sample size, this may be misleading.
While only 33% of firms are using data analytics software, the importance of data is understood. 78% of SMEs are seeing commercial benefits from data. These include customer services (40%), Marketing (35%) or efficiency savings (33%).
The report touches on AI, and SMEs are starting to see the benefits of generative AI. However, the report does not really dive into the topic in a meaningful way.
While 56% of SMEs believe that the planet is facing a climate crisis. Only 36% have a plan to combat it. The report briefly examines the barrier to adopting environmental policies. Finding that cost and time to value are inhibitors. It argues that the government should do more to help.
Adopting innovation and business support
The section looks at the different avenues of support for startups and SMEs nationwide. It notes that there are 750 start-up support programmes across the UK. However, there is much less support for existing SMEs, and government support seems to be fading. Considering the importance of SMEs to the economy, should the owever government be doing more? The authors argue that support must be local and not just for companies looking for growth.
Enterprise Times: What does this mean
This is a comprehensive and compelling report that government bodies in the UK should take note of. For SME leaders, it provides insight into the existing challenges and opportunities. The report is certainly worth a read, though the Green adoption section was light. The subject could have covered a wider range of environmental questions. Such as the adoption of electric vehicles, waste and other factors.
Where this report fails slightly is the omission of big business from its recommendations. SMEs often form part of the supply chain for larger businesses. Especially with the environmental Scope 3 requirements, there is now a greater onus on larger corporations to help their supply chain become greener and more efficient. If nothing else, smaller businesses might benefit from the learnings of the larger enterprises.
While this report focuses on innovation, it wisely notes that innovation is not the sole responsibility of startups. Existing SMEs must consider how they can innovate within their organisation. Bringing automation and efficiency to further improve revenue and reduce costs.
McKenzie noted, “The pandemic has shown how quickly start-ups and small businesses are to move with new ideas that change the economy, often up against large incumbents. These small firms are keen to keep that legacy alive but are also facing scarcer government support – cuts to R&D Tax Relief Scheme for SMEs, the scrapping of Help to Grow: Digital Scheme, and downscaled support for Growth Hubs.
“The reduced government support is down to a top-down approach to innovation policy overlooking the potential of 99% of the total business population. Becoming the next Silicon Valley won’t crack the productivity puzzle, if we can’t also encourage all firms to adopt new technologies and improve their process. Innovation must be for the many, not for the few.”