Driving innovation in SMEs: Hopes for Budget 2017

2016 was a tough year for Singapore’s economy. According to the Singapore Business Federation’s National Business Survey (NBS) 2016/2017, only 1 in 10 businesses expected the economic climate to improve over the next 12 months, whilst almost 50% of those surveyed felt that it could get worse. The overall SBF-DP SME Index reading for 1Q17 to 2Q17 also recorded its lowest reading of 49.8 in seven years, reflecting the business uncertainty felt among local businesses.

Notwithstanding the multiple risk factors including geopolitical uncertainties, protectionism, and anti-trade sentiments that confront the world economy, to remain agile and competitive, local business must continue to have an eye on seizing opportunities for growth.

To that end, innovation is important. Yet, with many small and medium enterprises (SMEs) already struggling with the longstanding challenge of rising business cost and resource constraints, innovation could be quickly relegated as less of a priority.

This is not surprising. Local SMEs bear significant financial risks when undertaking R&D and innovation. In many instances, local SMEs will forgo R&D for more tried and tested, yet less productive and efficient ways, to operate their business. To help businesses overcome the cost burden of innovation, fiscal assistance from the government at this year’s Budget will be welcomed.

One of the ways is to introduce a cash payout scheme relating to qualifying R&D expenditure incurred by local SMEs. The existing R&D incentive scheme, which provides all taxpayers with enhanced tax deductions for qualifying expenditure incurred on R&D activities, will expire after Year of Assessment (YA) 2018.

Many local SMEs, by sheer size of their business and turnover, are in a non-tax paying position – and this is the category of taxpayers most in need of government financial assistance – have been slow to take up the current R&D incentive scheme. Part of the reason could be that this category of taxpayers is primarily focussed on cash savings rather than tax savings.

Several other countries have introduced R&D cash incentive schemes for local SMEs to complement their existing R&D credit or tax deduction incentive schemes. For example, in Ireland, the country offers a 25% R&D tax credit on qualifying spend, and excess R&D tax credits not relieved against corporate tax charges can be refunded in cash instalments paid over three years.

R&D cash incentives can be very effective in partially offsetting the financial risk hurdles hampering R&D among SMEs. Therefore, it would be positive for SMEs if the existing R&D incentive scheme can be modified to provide them with the option to convert qualifying R&D deductions into a non-taxable cash benefit at, for e.g., 40% of the eligible R&D expenditure, and may be capped annually.

Another consideration, when driving innovation and R&D, is the availability of the right talent.
The Productivity and Innovation Credit lapses after YA 2018. To encourage SMEs to continue to invest in upskilling or reskilling their workforce, whether to seize opportunities in the future digital economy or enhance business models for improved productivity, it is hoped that the government can extend the enhanced deduction claims on training costs incurred by businesses for their employees, with the option to convert qualifying training deductions into a non-taxable cash benefit.

As evident in the above proposed suggestions, small tweaks in the existing measures – particularly those that reflect the attractiveness of cash payout benefits to SMEs – can potentially motivate SMEs to reinvent their products, process, and services and invest in the necessary capability development for innovation.

Considering that SMEs make up 99% of all local businesses and employ 70% of the workforce, the potential impact of these measures, if successful, can be significant from both a business and economic standpoint.

The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.