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The crucial role innovation needs to play in your business

FSB is calling on the Government to introduce a new tax credit to address a worrying innovation gap that’s holding back the UK’s productivity.

A new report released by FSB reveals that almost a quarter (24%) of small firms have not made any significant changes to products or ways of working in the last three years – with many held back by pressures on time and finances.

Spotlight on Innovation has revealed that 76% of small businesses have made some kind of significant improvement to their business in the past three years.

You can read the full report here

Innovation for small firms is not confined to a workshop or lab. The report shows small businesses that do innovate are far more likely to introduce a change within their business (95%) like a new software or change to organisational structure or marketing process, rather than invent a new, market-changing product (25%). This has implications for the current innovation debate, which focuses mainly on creating new products rather than ways of working.

As well as improving support for those creating ‘new to market’ innovations, including reducing the complexity of the R&D tax credit and Patent Box Tax relief systems, Government must put more emphasis on supporting businesses to make improvements within their firm. Larger firms should help promote innovation throughout their supply chain and, where appropriate, encourage them to make claims for tax credits.

Currently, almost half (43%) of small firms that are thinking about making changes, say a lack of time is holding them back, followed by a lack of skilled employees (37%). Almost a third (27%) say they can’t decide if the disruption is worth the longer-term benefits.

Key to improving these numbers- and getting more businesses innovating- is supporting smaller business owners to build on their leadership and management skills, allowing bosses to be able to translate ideas and good intentions into action. 

FSB is calling on Government to introduce a tax credit or relief to alleviate the cost of taking time out of running a business to undertake training, as well as work with organisations to provide more tailored training packages. Small businesses would also benefit from a greater offering of flexible and accessible learning opportunities from universities and business schools.

With research showing less than half of smaller firms have used cloud services (40%), online data storage (37%) or file transfer technology (33%), more needs to be done to help business owners introduce productivity-boosting technology. FSB is urging Government to explore the idea of growth vouchers to take up digital technologies.

Martin McTague, FSB Policy Chairman, said: “Think of innovation, and introducing new, market-changing inventions might spring to mind. While these are undoubtedly important, our research shows that changes made within small businesses can have huge impact on their productivity. This could be a basic change to their software or cloud-based services, or even their organisational structure or marketing process.

“So as well as eye-catching announcements on things like AI or driverless cars, policy-makers should be looking at how to help the whole small business population innovate by making these improvements and efficiencies to existing processes and products.

“Improving leadership and management within small businesses is key to increasing innovation and output. They are critical in putting good ideas into action.

“We are calling for Government to explore putting in place a tax credit for those time-poor small businesses that can’t afford to take time out of their everyday businesses to take part in training. With half of those firms considering making changes, citing a lack of time as a major barrier, this could significantly enhance these figures.”

With just 10 per cent of innovating small firms accessing Government financial support, improvements need to be made to increase awareness of what support is on offer.

Despite a rise in the number of R&D tax credit claims in recent years, only one in three (27%) incorporated firms that have introduced a new product to the market, have qualified and claimed funding. A worrying 40 per cent of these incorporated businesses were not even aware of any R&D tax relief that would be relevant to their business.

Martin McTague added: “The current system of initiatives that should be fostering innovation within small firms is clearly not working as well as it should. Government needs to up its game in terms of increasing small firms’ awareness of what’s on offer, with more accessible advice and look again at the scope and design of some aspects of these interventions.

“It’s essential that Government should do more to encourage larger companies to work with smaller firms in their supply chains to encourage them to make claims for tax credits like R&D funding where appropriate. This is a win-win situation, with benefits flowing back up the supply chain and into the economy as a whole.

“Innovation is key to the survival and growth of all smaller businesses and a vital ingredient in the growth and development of a small business. But to have a sustained and game-changing impact on the economy, the focus needs to be on how to improve productivity across all the UK’s 5.7m small businesses and the self-employed and this needs a fundamental redefinition of what we mean by innovation.”

You can read the full report here