R&D tax relief for SMEs slumps by £1bn
by Will Drysdale, Senior Reporter, Business & Accountancy Daily
The amount paid out to SMEs in research & development (R&D) relief has been declining since 2021/22 as less companies attempt to claim the relief
In 2019-20 and 2020-21, £4.2bn was paid to small and medium sized businesses (SMEs), rising to £4.7bn in 2021-22. There were 71,900 claimants in 2019-20, increasing to 74,100 in 2020-21.
Since then, the level of relief has been dropping, estimated to fall to £3.1bn this tax year, from £3.4bn in 2023-24. There is no data on the number of claimants yet for these years due to companies having up to two years to file for R&D relief.
HMRC said the drop in claimants was due to the ‘introduction of the mandatory additional information online form’, which has resulted in large numbers of claims being rejected.
Katy Long, associate director at ForrestBrown said: ‘It’s important to acknowledge R&D tax relief’s positive role as a catalyst for business innovation. The changing costs we have seen in recent years are a product of the policy reforms introduced during a turbulent period for the scheme, but this doesn’t negate the value of the incentive.
‘The diverging costs of the RDEC and SME schemes clearly highlight the impact of rate changes, boosting generosity for larger businesses while reducing financial support for SMEs, the impact of which has been further amplified by HMRC’s volume compliance approach.
‘Although “rebalancing” the rates was aimed to combat error and fraud, it’s imperative that it doesn’t unintentionally harm smaller businesses that depend on the scheme to drive innovation.’
Following the clampdown on fraudulent claims, a staggering 38% of companies have had their R&D tax relief claims rejected by HMRC despite being given initial approval, while 34% were rejected from the start.
The pre-registration requirement was first put in place to deter and reduce the level of fraud and has been mandatory since August 2023.
Justine Stalker, partner at Saffery, said: ‘HMRC’s revised approach to R&D relief has been extremely heavy handed and whilst this has been a response to the level of fraud, there are clearly genuine claimants who have made a conscious decision to not claim the relief, particularly those companies falling as an SME and those with more modest claims.
‘Arguably there are some companies waiting to see what happens or wanting to get over an R&D enquiry from an earlier period before making a claim. However, claims for the 2022/23 period that can be made within the amendment window and after the release of HMRC’s statistics are unlikely to have a significant impact on the results.’
HMRC has predicted there will be £601m worth of fraud across both R&D schemes for the 2023-24 tax year, which would be 7.8% of total expenditure. The majority of the fraud is expected to come from £475m in claims for SME R&D relief, with the remaining £125m from RDEC relief.
Although the predicted fraud for the 2023-24 year is just an estimate, HMRC stated: ‘The cost of the scheme is expected to fall further in 2023 to 2024 when the lower relief rates take effect’.
Between 2007 and 2021 the R&D budget for the UK has only risen by 14%, lagging behind most other countries who pay out relief for R&D.
Lord Philip Hammond, former Chancellor and senior adviser at RCK Partners, said: ‘The challenge has always been to reduce fraud and error in the R&D tax credit schemes and eliminate organised criminal activity targeting them, without undermining the positive incentive effect of the schemes for businesses undertaking eligible R&D investment.
‘HMRC has made good progress on reduction of fraud and error, and I expect that agent identification will be an important further step, but reductions in the rates of credit payable risk disincentivising R&D investment in the UK, to the detriment of our competitive position.’
R&D relief for larger businesses has continued to climb over the last five years, almost doubling the amount paid out since 2019-20 when the figure was £2.7bn. In 2023-24 this is expected to rise to £4.6bn, and again the following year to £5.3bn.
The number of RDEC claimants of is significantly lower than for SME relief, with the highest number of companies claiming it rising to 11,000 in 2021-22, however, this fell to 10,100 in 2023-24.
In terms of each sector, the largest number of claims came from the manufacturing sector in 2022-23, followed by IT, and then professional, scientific, and technical. These three sectors alone accounted for £5bn worth of the R&D expenditure, with almost 45,000 claims in total, accounting for 70% of total R&D relief.
In just three years the number of HMRC compliance staff working on R&D claims has more than doubled, with 300 extra case workers focused on non-compliance. This could be why the number of SME claimants is reducing as HMRC manages to crack down on more companies.
Stalker said: ‘This hopefully means the era of “cowboy” R&D boutiques and fraudulent claims is nearing an end.
‘With HMRC recently saying that they are concentrating on training their R&D team, which is aimed at making the enquiry process fair and consistent between taxpayers, we will also hopefully see genuine R&D claimants, including SMEs, having an appetite to claim the relief they are due.’
This includes the blocking of ‘hijacked businesses’, leading to £85m in claims being rejected, challenging over 2,500 claims and the arrests of nine individuals.
To further combat fraudulent claims and those made in error, HMRC has run campaigns targeted at industries which are not likely to be eligible for any relief but are also deemed targets for ‘unscrupulous agents’. Since 2023 every claimant has had to tell HMRC the name of the agent that advised them when making the claim.
In total for 2023 there was £50bn worth of R&D performed by UK businesses, an increase of just £1.4bn (2.9%) from 2022. Following the trend of previous years the largest contributor was the pharmaceutical sector, with £8.7bn (17.4%) of R&D activities.
Long said: ‘With large businesses contributing £30.7bn in expenditure, it’s positive to see that they are demonstrating resilience and a capacity to invest heavily in innovation.
‘At the same time, the data underscores the challenges faced by SMEs, who are feeling the strain of recent R&D tax relief reforms, reduced rates of support and HMRC’s volume compliance approach. It’s vital to avoid a scenario where the risks of claiming relief outweigh the rewards for small innovators.
‘The recent promise of stability is welcome, giving businesses the confidence to plan long-term R&D investments. But to truly measure the success of R&D tax relief, a good starting point is setting a bold and clear target for private sector R&D investment, shifting the conversation from costs alone to the value the incentive creates for the economy.’
