Compliance crackdown or missed opportunity? Decoding the latest R&D tax credit trends for UK businesses

Every year, HMRC publishes statistics relating to R&D tax credits, and for 2024 these were released at the end of September. They include a first look at the 2022/23 tax year, and are also an opportunity to revise figures for previous tax years as more data becomes available. This year, the statistics tell a notable story; one undoubtedly tied to the actions HMRC have taken to drive improved compliance, following reports of widespread error and fraud. To summarise some of the key points, we have seen:

• A 1% increase in the total tax relief claimed from the previous year – £7.5 billion
• 4% higher corporate R&D expenditure than the previous year - £46.7 billion
• A 21% drop in the number of R&D tax relief claims made (23% drop in the SME scheme, 9% drop in RDEC)
• A disproportionate drop of the smallest claim values (sub-£15,000)
• A 28% increase in the average claim value

The story behind the numbers: compliance for R&D claims

As we said, the numbers tell a story and the biggest headline is the 21% reduction in the overall number of claims. Drilling a bit deeper, the SME scheme saw a 23% reduction, and when you compare the number of claims by cost band to the previous year, the story becomes more stark.  For claims worth £250,000 and higher, the volume increased in every category by at least 10%. All claims worth less than £250,000 dropped in number by at least approximately 10%, and in the case of the three cost bands below £15,000, the reductions were between approximately 25% and 35%. It is a significant drop. This coincides with a stricter compliance regime that HMRC have adopted in 2023 (remember claims are made retrospectively so this affects the (22/23 figures). R&D tax credit changes include advanced notification and an additional information form, as well as more robust processes at HMRC. The strong implication is that companies making smaller claims are weighing up the upside versus the perceived challenges and deciding it is not worth it. The industry would breathe a sigh of relief if this weeds out all those claims marred by error and fraud. But are legitimate claimants being discouraged too? The number of first time claimants has dropped for a third year, and these numbers are a year behind (so the latest are for 21/22). We will await the 22/23 figures next year with interest. Andy Royce, Head of Consulting at Kene  commented: “The 4% increased spend matched against 21% fewer claims means the focus on compliance appears to be having the desired effect. The big question is whether that reduction also includes numerous legitimate claimants who don’t have the appetite or resources for a fight with HMRC. This is clear when you consider the reduction in claims under £15k.“With the budget around the corner and the merged scheme in place, positive statistics should mean some respite for R&D claimants. But let’s not get too excited - SMEs have been seen as a tax cash cow by successive governments and it’s unlikely to change for now.”

Implications for SMEs and larger businesses

While we accept the need for greater compliance, we have concerns for those genuinely innovative SMEs who are now more tentative about claiming R&D tax credits. There is a fragile innovation cycle where confidence in the tax regime affects budgeting and innovation decisions.  Larger firms have the resources to more comfortably handle compliance demands, and the spectre of an enquiry in which they’ll need to defend their claims. For SMEs though, a lack of clarity over what they may be able to claim, additional administrative work and the prospect of a distracting enquiry may be too much, and they rein in their research and development due to the uncertainty. HMRC R&D tax statistics always include a wealth of other data such as head office location of claimants and claims by industry type. It is no surprise that London and the South East dominate the location for claims (although the innovation itself may be happening away from the head office in many cases); and that the top industries for making claims are manufacturing, information & communication, and professional, technical and scientific.  We will continue to educate companies across the UK about where innovation actually occurs and what constitutes valid UK R&D claims.

Future outlook: merged R&D scheme and upcoming budget

These figures do not reflect the new merged RDEC scheme (supplemented by the minor, but more generous, intensive R&D scheme). Generally speaking, SME tax relief is lower now than under the old SME scheme, but the RDEC rate itself is higher than it was previously. So, the rate for SMEs and large companies has been equalised, but for large companies it is more than before. This is good news for larger companies, but again feeds into the narrative of making life harder for SMEs. Next year’s statistics will be telling on the impact of this policy on the nation’s innovation. And before that, much sooner in fact, we have Labour’s first Budget, due on 30 October 2024. The new Chancellor has briefed us all well that there is a supposed £22 billion black hole to fill. Moreover, Labour have promised not to raise income tax, National Insurance or VAT, which limits where extra tax revenue can be found. Could UK research and development tax relief be in her sights? Given the major reform we have already seen in recent years, we would trust that the Budget will leave R&D tax reliefs alone. This will give UK businesses a chance to become accustomed to the new merged RDEC scheme, and build confidence to plan for future research and development.  And for all of the just criticism – that too little compliance with the schemes has occurred historically, these statistics may bear out that HMRC is getting a grip on it.

R&D claim and enquiry support for innovative businesses

For UK businesses with an innovative mindset, we would urge you to work with reputable tax professionals like Kene. Doing so will reduce your risk and optimise your claim value. Not only can we help you navigate the claims process correctly and advise on what is possible, but our service comes with built in enquiry support so you will never be left on your own. Despite the challenges, whenever a business is eligible you should explore R&D tax credits. It remains a valuable support package to help you get ahead of, or just keep up with, your competition.  To book a free consultation, please get in touch.