The amount of research and development (R&D) relief paid to small and medium-sized enterprises (SMEs) has fallen since 2021/22. After hitting a high of £4.7 billion in 2021/22, down from £4.2bn in both 2019/20 and 2020/21, it is estimated to drop further to £3.1bn in the current tax year, following a decline to £3.4bn in 2023/24.
Fewer SMEs claiming R&D relief
While data on claimants is not yet available for 2023/24 and beyond, previous figures show a slight rise in claims before the decline. In 2019/20, 71,900 SMEs claimed R&D relief, increasing to 74,100 in 2020/21. However, the introduction of HMRC’s mandatory additional information online form has significantly reduced successful claims.
Since August 2023, pre-registration has been compulsory to reduce fraudulent claims. Despite receiving initial approval, 38% of companies had their R&D claims rejected by HMRC, with 34% rejected outright at the start.
The stricter compliance regime comes amid predictions of £601 million worth of fraud across SME and large business R&D schemes in 2023/24. Fraudulent SME claims are expected to account for £475m of this figure, with the remaining £125m attributed to claims under the research and development expenditure credit (RDEC) scheme.
Stricter rules target fraud and errors
The Government’s efforts to reduce fraudulent claims have doubled the number of HMRC compliance staff focused on R&D claims. Over the past three years, 300 additional caseworkers have been deployed, leading to the rejection of £85m in fraudulent claims, the challenge of 2,500 cases, and the arrests of nine individuals.
To combat fraud, HMRC has also introduced campaigns targeting industries less likely to be eligible for relief while requiring all claimants to disclose the name of their advising agent. This has mainly targeted ‘hijacked businesses’, which fraudulently claim relief under false pretences.
SME relief drops as RDEC increases
While SME R&D relief is in decline, claims under the RDEC scheme for larger businesses have surged. Payments to larger companies have almost doubled since 2019/20, rising from £2.7bn to an estimated £4.6bn in 2023/24, and forecast to reach £5.3bn in 2024/25.
The number of RDEC claimants remains significantly lower than those under the SME scheme, peaking at 11,000 in 2021/22 but falling slightly to 10,100 in 2023/24.
Manufacturing, IT, and science sectors lead claims
In 2022/23, the manufacturing sector made the most claims for R&D relief, followed by IT and professional, scientific, and technical services. These three sectors accounted for £5bn of R&D expenditure and almost 45,000 claims, representing 70% of all R&D relief claims.
UK R&D investment lags behind
Despite these figures, the UK’s overall R&D spending has grown modestly. Between 2007 and 2021, the national R&D budget rose by 14%, falling behind other countries with similar relief schemes.
In 2023, UK businesses carried out £50bn worth of R&D, an increase of only £1.4bn (2.9%) from the previous year. The pharmaceutical sector remains the largest contributor, accounting for £8.7bn (17.4%) of all R&D activities.
Outlook for R&D relief
As HMRC enforces tighter rules and lowers SME relief rates, the scheme’s cost is expected to decrease further in 2023/24. While these changes are likely to deter fraudulent and erroneous claims, they may also discourage legitimate SMEs from pursuing relief, limiting their ability to invest in innovation.
With the gap widening between SME and large business relief, concerns remain over the UK’s competitiveness in fostering small-scale innovation compared to other nations.
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