The amount of research and development (R&D) tax relief claimed by SMEs has been declining since its peak in 2021/22. Payments to SMEs reached £4.7 billion that year, up from £4.2bn in 2020/21, but are forecast to drop to £3.1bn in 2024/25. Claimant data for recent years is unavailable as companies have two years to file.
HMRC attributes the decline to tighter controls, including a mandatory online form introduced in August 2023. This has led to 38% of claims being rejected after initial approval and 34% rejected outright. Fraud prevention measures, such as pre-registration and agent identification, aim to reduce fraudulent claims, estimated at £601 million for 2023/24. Most fraud (£475m) comes from SME claims, with the remainder linked to larger companies under the R&D Expenditure Credit (RDEC) scheme.
While SME relief is shrinking, larger businesses have seen payouts nearly double from £2.7bn in 2019/20 to a projected £5.3bn in 2024/25. Manufacturing, IT, and professional services dominate claims, accounting for 70% of total R&D expenditure.
Increased scrutiny has also seen HMRC double its compliance staff in three years. This includes challenging over 2,500 claims, rejecting £85m in fraudulent claims from hijacked businesses, and targeting ineligible industries.
Despite the stricter rules, R&D spending by UK businesses rose by just 2.9% in 2023, totalling £50bn. Pharmaceuticals remain the largest contributor, accounting for £8.7bn of this expenditure.
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