Small and Medium-sized Enterprises: AI Sector

(Limited Text - Ministerial Extracts only)

Thursday 29th October 2026 Lords Chamber

[Lord Ranger of Northwood]

To ask His Majesty’s Government what assessment they have made of current business confidence among small and medium-sized enterprises in the AI sector and what actions they are taking to encourage investment.

[The Parliamentary Under-Secretary of State, Department for Business and Trade (Lord Leong) (Lab)]

My Lords, the Government’s core evidence is the AI sector study. The 2024 study found that SMEs make up 96% of UK AI firms, and nearly 90% of firms surveyed expected revenue growth within a year. To encourage investment, the sovereign AI fund, backed by up to £500 million, invests directly in British AI start-ups, alongside free compute through the AI research resource, Innovate UK’s £130 million growth catalyst, and a £100 million R&D procurement scheme.

[Lord Ranger of Northwood (Con)]

My Lords, I thank the Minister for the Answer and welcome the announcements in yesterday’s Budget in support of AI. Across a kaleidoscope of initiatives, the Government announced a total of about £600 million. To put that into context, JP Morgan advises that US hyperscalers driven by AI investment this year alone will invest $697 billion. There is a fundamental difference between investing in AI technology and enabling British businesses to benefit from it. That is where we need to focus. I declare my interest as a co-founder of the Business AI Alliance, a grouping of over 300 British AI tech SMEs that are searching for support from the Government. With the new programme for local funding on AI adoption worth £30 million and focused on Yorkshire, does the Minister recognise the risk of creating a two-tier AI economy where larger businesses and those in selected regions benefit while others fail?

[Lord Leong (Lab)]

My Lords, yesterday’s Budget announcement demonstrates our commitment to turning AI ambition into practical outcomes. Alongside the £700 million in wider AI investment, we are providing, as the noble Lord has mentioned, £30 million for locally led AI adoption partnerships, starting in Yorkshire, and £60 million for an AI pathway fund. These initiatives will help businesses overcome adoption barriers, build skills and improve productivity. Working alongside local leaders in the industry will ensure that funding delivers measurable benefits for British businesses across the country.

[Lord Clement-Jones (LD)]

My Lords, I declare an interest as an adviser to DLA Piper on AI policy and regulation. The Government talk of sovereign AI but continue to award their biggest data and tech contracts to US hyperscalers. What share of public AI procurement is intended to go to British SMEs under the new UK supplier definition?

[Lord Leong (Lab)]

I hear what the noble Lord, says but I say again that our £100 million R&D procurement scheme will help British start-ups develop innovative solutions to government challenges. We are making government a smarter, more accessible customer and creating procurement opportunities for smaller firms instead of favouring established suppliers. Through the sovereign AI fund, we are also supporting early start-up procurement, enabling innovative businesses to demonstrate that technologies generate revenue and attract private investment.

I encourage noble Lords to visit local university science and technology hubs and see innovative AI companies. I was up in Manchester yesterday and there I saw young people and exciting projects. Perhaps noble Lords could go out to university science parks and be encouraged by what is being developed in this country.

[Lord Walney (CB)]

My Lords, does the Minister agree that the Government’s support for, and adoption of, an open source AI framework could greatly reduce the barriers to entry for smaller firms and accelerate investment, particularly if this could be done in partnership with allied nations across the world?

[Lord Leong (Lab)]

I agree with the noble Lord. That is why the British Business Bank has £25.6 billion in financial capacity to support smarter and smaller businesses, including £4 billion in growth capital specifically for innovative research-intensive companies. The sovereign AI fund works alongside the bank, including co-investing in a company called Ineffable Intelligence, a London-based artificial intelligence research lab. Meanwhile, the National Wealth Fund, with £27.8 billion to deploy, is mobilising private investment in AI infrastructure, including a guaranteed £202 million to support various AI companies.

[Baroness Nargund (Lab)]

My Lords, I draw the House’s attention to my interests as set out in the register. I too welcome the investment in AI in yesterday’s Budget. AI presents a significant opportunity for businesses to innovate, attract investment and grow our economy. However, it also risks widening the existing gender gap in skills, pay, innovation, leadership and investment. Our own research found that 43% of young women entering the workforce are concerned that AI will replace them. We also know that only 2% of funding from venture capitalists has gone to all-female founding teams. Can the Minister say what steps the Government are taking, in partnership with businesses, to ensure that women have equal access to AI skills, AI-enabled employment, and opportunities for innovation, leadership and investment?

[Lord Leong (Lab)]

I am very proud to co-chair a women in industry taskforce. I work with women leaders every day to encourage them to start their businesses, especially in tech. I am sure my noble friend will appreciate and welcome yesterday’s Budget, in which the Chancellor said that he will work with the Women in Tech Taskforce to find ways that women founders can access available finance. If we empowered women in tech in the same way as men, it would generate £300 billion for the economy. We must support women tech founders.

[Lord Sharpe of Epsom (Con)]

My Lords, I have a nice, short question: AI investors have told the Government that energy costs are the barrier to investment here, so can the Minister say why yesterday’s Budget found room to cut tariffs on gherkins but not cut the energy costs holding back our AI capacity?

[Lord Leong (Lab)]

Perhaps the noble Lord should read the entire Red Book. We are supporting AI companies in many ways. As far as data centres are concerned, we are ensuring that our national grid is linked up to them. At the same time, we are supporting the entire AI ecosystem, in every aspect of a company within that system. There is a lot more to do, and we are doing it.

[Lord Fox (LD)]

My Lords, back in 2017, the Made Smarter Review identified that a major impediment to SMEs adopting the then-available technology was the management’s expertise and knowledge, particularly around digital issues. Putting his Small Business Minister hat on, can the Minister tell your Lordships’ House what the Government are doing to enable those small businesses that could grow using AI to get the expertise they need to do so?

[Lord Leong (Lab)]

As Minister for Small Businesses, I spend every day talking to businesses of all sizes, including small AI start-ups. We must ensure that small companies have access to finance to start their business. At the same time, we need to encourage young people to take up AI skills. We are committed to training 10 million young people in AI skills and, so far, 2.2 million have completed programmes.

[Lord Patel (CB)]

My Lords, I commend the Government for their investment in Isambard 1 computing at Bristol University, which I gather has now had approaches from several hundred SMEs to use its computing power, which is one of the fastest processors globally. What plans do the Government now have to install Isambard 2, which I understand Bristol University would welcome and would increase even further the United Kingdom’s compute power?

[Lord Leong (Lab)]

The noble Lord is right. We have to invest not only in compute power but in quantum. The Government have set up their programme whereby they will mobilise investment through the sovereign AI fund to invest in some of the supercomputers across the country.

[Lord Kirkhope of Harrogate (Con)]

My Lords, it is not just a matter of government resources. Many enterprising businesses are now coming into this field. I welcome the work going on in Yorkshire at present, to which the Minister referred. Surely, though, this is to do with even greater encouragement by government of those who are investing, to try to make that sure academia is heavily involved and that all the businesses that are raring to go to develop and innovate in AI are able to do so with full government encouragement.

[Lord Leong (Lab)]

The Government are absolutely encouraging universities and academics to support the Government’s programme on AI. As I said in answer to an earlier question, I have spent the last couple of weeks visiting various universities and science and technology hubs. All of us should really welcome the exciting start-ups being set up at these university science parks. The UK is not short of innovators and we have a pipeline. We will likely see some of our innovators be unicorn companies.