R&D tax claims by SMEs fall by 19%
Sara White, Editor, Business & Accountancy Daily
Crackdown on abuse of R&D tax relief by SMEs sees sharp fall in number of claims but total paid out to all business up 5%
An overhaul of research & development (R&D) tax relief in the past year has resulted in major changes to the amount of claims being made.
Latest HMRC figures for 2024-25 show £8.2bn of total R&D tax relief was paid out over the year, up 5% from £7.8bn but claims by SMEs were down by 19% after HMRC tightened up application process with more robust pre-claim checks at the point of submitting a tax return.
Qualifying R&D expenditure totalled £51bn for the period, up 7% from 2023-24, but the number of claims dropped sharply by 17% to 40,325 claims, down by nearly a fifth in just 12 months.
There are also clear signs SMEs are pulling back from using the tax break with only 24% of investment in R&D applicable for relief carried out by these smaller businesses, while 76% was spent by large companies claiming under either the RDEC or Merged RDEC scheme.
In fact, a very small proportion of claims (6%) accounted for 69% of the total value of claims – benefiting from nearly £6bn of R&D claims, reflecting the concentration of the tax break for a few core sectors and businesses. By contrast, SMEs successfully claimed a total of £3.6bn, although only £2.3bn was for SME only schemes.
HMRC said the biggest impact on the numbers was the introduction of the additional information form (AIF). This requires companies to submit detailed information about their R&D claim through the HMRC portal claim before a R&D claim is made on a corporate tax return, rather than the previous framework where tax relief was paid out and then later reviewed by tax inspectors.
The AIF has been mandatory since August 2023 and is having an impact on high levels of earlier fraud and abuse as a failure to submit an AIF invalidates the R&D claim.
This has led to a sharp decline of 36% in the number of SME Intensive and ERIS claims in a single year, with only 4,965 companies getting approval for this tax break.
Meantime, across all claims by SMEs (including RDEC and Merged RDEC claims made by SMEs) there was a 19% drop in the number of claims made for R&D relief compared with the previous year.
Source: HMRC
While these figures are stark, other changes to the R&D relief system also contributed, with reorganisation of various reliefs and threshold changes now reflected in the figures.
HMRC cautioned: ‘The decrease in SME scheme and ERIS claims is partly due to the introduction of the new schemes, as a number of SMEs now instead make claims under the Merged RDEC scheme.’
There were also new rates of relief with a 20% taxable credit for RDEC, and an 86% expenditure enhancement with a 10% payable credit for surrendered losses in the SME scheme (14.5% for R&D intensive SMEs).
Increasing complexity of R&D relief
But while additional checks will have had some impact on claim levels, the increasing complexity is also a concern while a raft of R&D tax disputes are going through the tax tribunals at the moment, some on appeal at higher courts.
Nigel Holmes, director of R&D at Ryan, warned: ‘HMRC will likely position the falling claim volumes as evidence that its compliance drive against error and fraud in R&D claims has done its job. But in practice, the regime is considerably more complex and more heavily scrutinised than it was a few years ago, and these statistics cannot tell us how many companies have decided claiming R&D relief is simply not worth the effort.’
This view was echoed by Carrie Rutland, a tax partner at BDO, adding: ‘Many businesses feel the compliance burden has become increasingly heavy, even where they have a long track record of making legitimate claims.
‘As the chancellor prepares for Budget 2026, the next step should be a more targeted approach. He has already stated his intention to reduce the compliance burden on businesses by 25% and we would like to see businesses with strong compliance histories benefitting from a simpler claims process.
‘Greater certainty and a more proportionate approach would help innovative businesses invest with confidence in the UK while ensuring taxpayers’ money remains properly protected.’
With John Healey’s first Budget as chancellor fast approaching on 28 October, Holmes called for action as the number of companies claiming actually fell even if the total tax break cost more than the previous year.
‘There’s a risk the Treasury reads a falling claim count as a saving,’ Holmes warned. ‘If part of that volume fall is genuine innovators walking away rather than fraudulent claims being filtered out, that isn’t a saving at all. Instead, it’s a reduction in the investment the relief was designed to buy, sitting underneath a headline figure that’s actually going up.’
