SME R&D claims fall as compliance pressures mount

The UK is seeing a significant drop in research & development (R&D) tax relief claims from small and medium‑sized enterprises (SMEs), with SME claims falling by nearly one‑third year on year, according to the latest HMRC figures. The decline is being felt across every UK region, with reductions in both the number of claims and total qualifying expenditure.

The drop has raised concerns that increasing compliance and fear of scrutiny are discouraging businesses from accessing vital innovation funding. According to HMRC, R&D claims are now under more intense examination than ever, with regulators doubling down on accuracy, governance and advisor credibility.

HMRC’s ongoing focus on improving the quality of claims has resulted in more structured, detailed submission requirements. For some SMEs, this means higher administrative efforts, additional costs and uncertainty, particularly affecting smaller businesses that lack internal resources or experience preparing R&D claims.

Accuracy is now critical. HMRC’s tighter review framework means incomplete or poorly evidenced claims risk delays, enquiries or rejections.

For listed and high-growth companies, the implications of an HMRC enquiry go beyond immediate tax concerns. An active investigation can slow down deal processes, complicate refinancing, or lead to more aggressive due diligence measures. Investors expect organisations to manage tax risk robustly, meaning credible governance around R\&D claims is now viewed as a key indicator of operational maturity.

The decrease is concerning, as this funding enables businesses to develop new technologies which in turn benefit the regional economy. Although costs can be considerable, successful innovation, whether a new product, service or process, can generate new revenue streams and additional tax contributions that help offset the relief. Companies with genuine R&D activity should not be discouraged from making a claim, with the right advice and support, businesses engaged in genuine innovation can continue to access relief confidently.

Relief accessed by SMEs declined by 29% compared with the previous year, dropping to £3.15 billion. In contrast, while the number of claims under the larger companies’ RDEC scheme fell by 5%, the total amount of relief claimed increased significantly, rising by 36% to £4.41 billion.

Across both schemes, HMRC reports that the provisional total value of R\&D tax relief claimed for 2023–24 stood at £7.6 billion. This represents a 2% decrease from the previous year and corresponds to £46.1 billion in R\&D expenditure, itself 1% lower year‑on‑year.

Earlier in the year, Heather Williams, Partner, submitted a wish‑list on behalf of Azets to the Chancellor, highlighting the increasing administrative challenges faced by businesses as the claims process becomes more demanding, especially following efforts to tighten controls on bogus claims. In a formal response, the then Exchequer Secretary to the Treasury, James Murray MP, confirmed that the government is committed to periodically evaluating the R&D reliefs to ensure they remain effective and grounded in up‑to‑date evidence. He emphasised the government’s recognition of the critical role R&D plays in driving innovation, economic growth and broader societal benefits.

The government also reaffirmed its commitment to maintaining both the merged R&D Expenditure Credit scheme and the enhanced support available for R&D‑intensive SMEs. It noted that each £1 of public R&D spending is estimated to stimulate between £0.41 and £0.74 of private R&D investment within the same year, increasing to between £1.96 and £2.34 over time.

We also raised concerns about flaws in the application system, including cases where successful claimants were required to repay tax relief more than a year later, urging the government to revisit the process.

Responding to these concerns, Murray highlighted that merging the SME and RDEC schemes has simplified the structure, creating a single set of qualifying rules for most claimants. He added that the enhanced support for R&D‑intensive SMEs follows many of the same principles, albeit with different rate mechanisms. The government, he said, will continue to explore longer‑term simplifications and improvements to ensure the reliefs remain effective and accessible.

We have supported many businesses with the full claim process, making sure they are fully complying with all HMRC requirements and making their case as robust as possible.

If you have concerns about your R&D tax relief claims or HMRC’s strengthened approach, please get in touch via the form below or contact your usual Azets adviser.