UK SMEs cut R&D after tax relief reforms, survey finds

Research commissioned by RCK Partners found that HMRC's R&D tax relief reforms have led many UK small and medium-sized businesses to cut research spending and jobs. The survey points to a sharp pullback among companies active in research and development.

Among 254 finance chiefs at R&D-active SMEs, 62% said they had reduced investment in research and development as a direct result of the changes. One in five had cancelled R&D projects outright, while 35% had hired fewer R&D or technical staff than planned and 29% had delayed projects.

The findings add to concerns that measures introduced to curb abuse of the tax relief scheme have also raised barriers for legitimate claimants. The reforms merged the previous SME and large-company schemes into a single regime, tightened advance notification rules for some applicants, limited relief for overseas R&D and increased compliance checks.

The effects appear to have spread beyond project decisions into staffing and cash flow. Three in ten respondents said delays or uncertainty over relief payments had led them to make redundancies or leave posts unfilled. The same proportion said they had taken out loans to cover the gap, while 26% said business leaders had used personal funds.

Processing times emerged as a central issue, with 72% of finance chiefs saying HMRC's timetable for processing and paying claims made the relief too unreliable to include in financial planning.

Companies that faced a compliance enquiry into an R&D relief claim waited almost four months on average for a substantive update, the research found. It also found that 59% waited between four and six months. Separately, 70% said HMRC had paid a claim to their business in the past five years and later opened a compliance check seeking to reduce or recover that relief.

Overseas work

The changes also appear to have had limited success in shifting research activity back to Britain. Just 5% of affected firms said they had relocated work to the UK, while 48% said they had stopped claiming relief and continued carrying out research overseas.

Respondents who kept work abroad cited economics and access to talent. Among those firms, 32% said lower relief rates made bringing work back to the UK uneconomic, while others pointed to lower costs overseas and stronger access to talent.

Larger businesses within the SME bracket were among the most likely to step back from the scheme. Among companies with 250 to 499 employees, 45% said they had decided not to submit a claim at all, compared with an overall average of 23%.

The survey results were accompanied by a reference to HMRC's own spending figures for the scheme. HMRC's latest accounts revised down the estimated cost of SME R&D relief in 2023-24 to GBP £2.34 billion from GBP £3.26 billion, a reduction of about GBP £920 million.

That fall suggests claiming activity among smaller businesses has dropped sharply since the reforms. It also indicates the reduction was greater than policymakers had expected when the changes were assessed.

"Innovative small businesses are the backbone of the British economy and the source of the growth we so badly need. That a scheme meant to back them is instead driving them to cut research and skilled jobs should worry anyone who cares about Britain's future prosperity," Lord Philip Hammond, Chair of the Board of Directors at RCK Partners.

The R&D tax relief system has long been used to encourage companies to invest in technical development, product design and scientific work that might otherwise be too risky or expensive. For smaller businesses in particular, repayments and credits can form an important part of funding plans, especially for companies not yet generating consistent profits.

Critics of the old system argued that the regime had become vulnerable to abuse, with weak claims and poor-quality advice contributing to fraud and error. The government tightened eligibility and scrutiny in response, but the new research suggests many finance leaders now believe the balance has shifted too far towards compliance risk and administrative delay.

"For more than twenty years, Britain deliberately gave its small and medium sized businesses more support, because successive governments recognised they face the greatest barriers to innovation and benefit most from help. In 2023, that principle was substantially weakened, with support for many SMEs more than halved. This research suggests those unintended consequences are now becoming clear. As policymakers continue to evaluate the effectiveness of the regime, they should consider whether the level of support given to SMEs is conducive to their ability to grow and innovate," said Rufus Meakin, R&D Tax Credit Specialist and Advisor to RCK Partners.