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Blog: Helping SMEs support the future of rail

This article was originally featured in Rail Director Magazine in January 2023. 

The blows for UK SMEs have been coming hard and fast for the last few years.

In 2016 we voted to leave the European Union, and in the following year began negotiating what would become a long and complicated exit.

Brexit bought with it wide-ranging issues across supply and logistics, trade, and labour that some sectors are yet to recover from. Then, just one day after our official EU exit on 30 January, the first coronavirus case was confirmed in the UK.

The subsequent spread of COVID-19 was declared a pandemic by the World Health Organization in March of that year, and Chancellor Rishi Sunak announced a series of measures designed to protect the economy and jobs – with mixed results.

No one could predict what would come next as almost the entire world entered an extended period of lockdowns that crippled economies globally.

And the pandemic had a particularly devastating impact on SMEs, who struggled to pivot; office workers became home workers, production lines stopped, slowed or switched output completely, and crucial revenue streams dried up overnight.

Across the world, even where rail travel was still possible, it quickly lost its appeal as new operational guidelines and public fear reduced capacity and usage.

In Indonesia rail transportation decreased by 56% YoY (pre and during COVID-19); in the States, the Amtrak received $1.6bn in relief from the impacts of the pandemic; and here in the UK it’s thought Government funding for the sector hit £13.3 billion between April 2021 and March 2022 (ORR).

MPA clients told us they expected attracting new customers and retaining existing ones to be the biggest challenges to be faced in the upcoming year; on reflection, that same client base cited operational and material price increases, and access to talent and skills, as the biggest obstacles they had to navigate in 2022.

Innovation for growth

Innovation funding can be the difference maker in times like this.

Many MPA clients choose to reinvest the relief they get through the Research and Development tax relief scheme, for example, in staff training, recruitment, improving efficiency, and stabilising cash flow.

At a time when the economy is drowning in never-ending challenges, then, the recent announcement of the reduction in R&D tax relief rates may be the final straw for some.

What is changing?

Rates for the SME scheme are being reduced, with Chancellor Jeremy Hunt specifically citing ‘significant error and fraud’ as the reason.

For businesses claiming R&D relief through the SME scheme, the rate of credit will decrease from 14.5% to 10%, while the additional deduction will decrease, from 130% to 85%.

In practice, this means a company claiming against £100,000 of qualifying expenditure would receive £8,600 in tax credit vs. £18,850 per current rates.

What about grant funding?

The government is funneling much of its R&D funding through its non-departmental public body Innovate UK by way of grants. Most are awarded via competitions designed to fund solutions to grand challenges, or that can be commercialised.

The downside to grants is that they’re incredibly competitive. The average success rate across all IUK competitions is 15 – 20%; for Smart Grants it’s even lower, with just 5 – 10% of applications being awarded support.

Not only that, grants often need to be match funded – so SMEs still need to raise significant capital themselves.

Future support

Passenger satisfaction, safety, capacity, efficiency, sustainability, digitisation and inclusion are crucial factors to ensuring a resilient rail network. Thankfully, efforts are being made to connect major stakeholders within the industry to solution holders, including SMEs.

For example, The Department for Transport’s First of a Kind Competition provides support for pioneering SMEs from the rail supply chain, while the Connecting Places Catapult can facilitate interactions between SMEs and markets.

In order to drive the modernisation we need to stay on track, rail leaders must continue to work with and invest in SMEs – as partners, suppliers, and as innovators. And SMEs, too, must continue to fight for the rewards they deserve – even if that fight feels impossible.

If you’re an SME exploring innovation funding, a scale-up with a great idea, or a market leader looking for tax efficiency, get in touch with MPA today.