Reforms to the UK’s R&D tax relief scheme, introduced to stamp out widespread fraud and error, are suppressing the very innovation they were designed to protect, according to the first research of its kind undertaken since the reforms.
More than six in ten (62%) finance chiefs say they have reduced their investment in research and development (R&D) as a direct result of the reforms, suggesting a clampdown that has overshot, deterring legitimate innovators as well as the bad actors it was meant to catch.
A survey of 254 chief financial officers at R&D-active UK SMEs, carried out by R&D tax advisory firm, RCK Partners, found the changes have pushed companies to cut research and lose skilled staff.
As a direct result of the reforms, more than a third (35%) have hired fewer R&D or technical staff than planned, almost three in ten (29%) have delayed projects, and one in five (20%) have cancelled R&D projects outright.
The human and economic costs are substantial. Delays or uncertainty in receiving R&D tax relief payments have led three in ten (30%) firms to make redundancies or leave posts unfilled. The same proportion have taken out loans to plug the gap, while a quarter (26%) have drawn on the personal funds of the business’s leaders.
Lord Philip Hammond, Chair of the Board of Directors at RCK Partners, said: “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.”
The changes, phased in from 2023, merged the previous SME and large-company schemes into a single, less generous regime, introduced onerous Advance Notification requirements for many claimants, restricted relief for R&D carried out overseas and sharply increased HMRC compliance checks on claims.
Firms that have faced an HMRC enquiry into a R&D relief claim waited almost four months on average for a substantive update, with six in ten (59%) waiting between four and six months. The uncertainty has left the relief impossible to count on: 72% of finance chiefs say the time HMRC takes to process and pay claims makes it too unreliable to factor into their financial planning. Seven in ten (70%) said that in the last five years, HMRC has paid out an R&D tax relief claim to their business and later opened a compliance check seeking to reduce or recover that relief.
Rufus Meakin, R&D tax credit specialist and advisor to RCK Partners, said: “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.”
The reforms have also failed to deliver one of the Government’s chief aims: new restrictions on overseas R&D costs were intended to bring research back to the UK. Instead, just 5% of affected firms surveyed have relocated work to the UK, while 48% have abandoned their claims altogether and kept their operations abroad.
Firms that stayed overseas say the cut to relief rates made bringing work home uneconomic (32%), while others cite lower overseas cost and talent advantages as outweighing the relief now on offer.
Larger SMEs have been hit hardest: as a result of the reforms, among firms with 250 to 499 staff, almost half (45%) have decided not to submit a claim at all, double the average (23%).
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