R&D tax relief reforms reduce research investment

Changes to the R&D tax relief scheme are causing innovative small and medium-sized businesses to scale back their research activity, new figures suggest.

Companies are reducing investment, delaying projects and cutting their recruitment, according to a new survey.

It questioned 254 chief financial officers at R&D-active UK SMEs and discovered that 62 per cent had cut their research and development investment as a direct result of reforms introduced from 2023.

Those reforms were intended to tackle fraud and error within the UK’s R&D tax relief regime.

The changes merged the previous SME and large-company tax relief schemes into a single system, introduced Advance Notification requirements for many claimants, restricted relief for overseas R&D and increased HMRC compliance checks.

However, according to the survey, more than a third of respondents had hired fewer R&D or technical staff than planned because of the changes and 29 per cent had delayed projects. One in five of those quizzed had cancelled projects altogether.

And three in ten reported making redundancies or leaving posts unfilled as a result of delays or uncertainty surrounding tax relief payments.

Figures published last October also showed a worrying trend. They revealed the number of SMEs claiming research and development (R&D) tax credits fell by nearly a third in 2023-24.

The report from HM Revenue & Customs (HMRC) showed that the overall number of claims by businesses fell by 26 per cent to the lowest figure in nearly a decade – with a 31 per cent drop when it came to SMEs.

They were the first statistics affected by the change in relief rates for the SME and R&D expenditure credit (RDEC) schemes.

That report last year, coupled with the survey reported in the media in July this year, raise major questions about how the changes may be negatively affecting innovation and growth plans in small businesses.

However, our message to SMEs remains clear. While there has been a sharp drop in the number of claims and the process may be more complex, smaller businesses should not be put off taking full advantage of R&D tax credits.

They can still be a powerful tool for ambitious SMEs working hard to drive growth through innovation.

We are here to help eligible businesses, whatever their size or sector, take full advantage of the scheme.

We will work with you to assess if your business qualifies and deliver full support and guidance in navigating the claims process.

• To discuss how we can support you in making a claim for R&D tax credits please contact me on 01772 430000