R&D tax relief reforms ‘discouraging innovation’, survey suggests
Changes to the UK's R&D tax relief scheme are causing many innovative small and medium-sized businesses to scale back research activity, according to new research from R&D tax advisory firm RCK Partners.
The survey of 254 chief financial officers at R&D-active UK SMEs found that 62% had reduced investment in research and development as a direct result of reforms introduced from 2023, which were intended to tackle fraud and error within the system. The findings suggest the measures may also be discouraging legitimate innovation.
According to the survey, more than a third (35%) of respondents said they had hired fewer R&D or technical staff than planned because of the reforms, while 29% had delayed research projects and one in five (20%) had cancelled projects altogether. Three in ten businesses reported making redundancies or leaving posts unfilled as a result of delays or uncertainty surrounding tax relief payments, while the same proportion had taken out loans to bridge funding gaps. A further 26% said business leaders had used personal funds to support company operations.
Lord Philip Hammond, chair of the board at RCK Partners, said the findings should prompt policymakers to consider whether the current regime was achieving its intended objectives.
"Innovative small businesses are the backbone of the British economy and the source of the growth we so badly need," he said. "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 reforms 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.
The survey also highlights concerns over the administration of the scheme. Businesses that had been subject to an HMRC compliance enquiry reported waiting almost four months on average for a substantive update. Nearly three-quarters (72%) of finance chiefs said processing times made R&D tax relief too unreliable to incorporate into financial planning, while 70% said they had previously received a tax relief payment only for HMRC to later open a compliance review seeking to reduce or recover the claim.
RCK Partners argues that the reforms have also fallen short of another key policy objective: encouraging more R&D to be undertaken within the UK. Among businesses affected by restrictions on overseas R&D expenditure, only 5% reported relocating work back to the UK, while almost half (48%) had simply abandoned claims and continued conducting research overseas. Larger SMEs appeared to be particularly affected, with 45% of businesses employing between 250 and 499 staff choosing not to submit a claim at all.
Rufus Meakin, R&D tax credit specialist at RCK Partners, said successive governments had historically provided additional support for SMEs because they faced the greatest barriers to innovation. He argued that the reduction in support introduced in 2023 had weakened that principle and that policymakers should consider whether the current level of assistance is sufficient to enable smaller businesses to grow and innovate.
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