Claims for R&D tax relief have slumped for SME’s

Claims for R&D tax relief have slumped for SME’s

The amount paid out to SMEs in research & development (R&D) relief has been declining since 2021/22 as less companies have attempted to claim.

Back in 2021-22 £4.7bn was claimed by SME’s with an estimated total of claims in the region of 74,000.

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 however no data on the number of claimants yet.

HMRC have advised that 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.

Following HMRC’s clampdown on 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.

A pre-registration requirement was also put in place to deter and reduce the level of fraud and has been mandatory since August 2023.

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 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.

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.

HMRC have recently advised that they are concentrating on training their R&D team, which is aimed at making the enquiry process fair and consistent between taxpayers, which hopefully means we will see genuine R&D claimants, including SMEs, having an appetite to claim the relief they are due.

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.

However 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 innovative businesses.