HMRC has just released the annual statistics detailing the use of the R&D tax relief and Patent Box schemes in 2023-24. This release is the first to incorporate some of the changes made in the R&D relief reforms first announced at the Autumn Statement 2022, and indeed the hardline approach by HMRC that really took hold in 2023. The stated aim was to help balance the scheme and hopefully reduce fraud and error. Has that approach worked, and are there any unintended consequences?
Overall, the number of R&D claims has halved from its peak
The biggest headline is that the number of claims has fallen dramatically from the historical high of 86,000 companies claiming in 2021. Latest numbers for 2024 suggest that this has almost halved to 44,065. There are 16,000 fewer companies claiming this year than in the previous year.
As such, we’ve seen SME support has dropped from £4.6bn to £3.1bn, with qualifying R&D expenditure down from £16.2bn to £14.5bn this year.
Although support provided through RDEC has increased, from £3.2bn to £4.4bn, this has mainly been driven by an improved relief rate and the increase in Corporation Tax main rate, from 19% to 25%, from 1 April 2023. It doesn’t reveal an increase in underlying R&D activity as the qualifying R&D expenditure under RDEC has only changed slightly from £24.8bn to £25.7bn
This is the first time we’ve been given an indication of the SME R&D intensive relief scheme, with 3,990 companies claiming £830m.
Did the R&D scheme need cutting down to this size?
Surely it can’t have been the right intention to halve the number of claimants in the space of just two financial years, whether it was HMRC’s policy or not. You’d be hard pressed to say 40,000 businesses were not eligible for the scheme and yet still have a perceived £700m gap due to erroneous claims. Either they’ve been looking in the wrong place, or the problem isn’t as big as it has been portrayed. I’m in the latter camp. I can’t help but conclude that this has been a very large sledgehammer to crack a relatively small nut.
Which sectors are winning and losing?
The statistics confirm that sectors that were targeted by HMRC with compliance checks and enquiries, like Wholesale, Education, Accommodation and Food, have seen a reduction in claims. However, it cannot have been HMRC’s intention for a sizable drop in claims across all sectors, including key sectors such as manufacturing and professional, scientific, and technical. This is one indicator that underpins the broader sentiment felt by UK businesses that recent changes, although reducing error and fraud, have also reduced business confidence.
The good news is that, though claims from the Financial Services sector have fallen, the rate is below the average, even though we know they had an HMRC target on their back.
Which companies are abandoning R&D tax relief?
The recent changes and HMRC scrutiny seem to have discouraged companies from discovering the scheme and making their first claim. The number of companies claiming for the first time dropped from a 2019 peak of 19,720 to 3,765 this year. Many of these companies could have been encouraged to the scheme in error, but surely this also indicates that genuine innovators have been put off from claiming the tax relief that they are entitled to.
The number of smaller claims, up to a value of £50k, has dropped significantly; have we reached the bottom? I have, elsewhere, made the argument for di minimis claims mainly for administrative savings that would represent.
- Up to 100k claim value, 9k claims a cost of £45m
- Up to 15k claim value, 13k claims a cost of £95m
- Up to 20k claim value, 17k claims a cost of £150m
Will the Treasury breathe a sigh of relief?
The scheme has created some financial headroom based on 2021 OBR projections in HMT’s report. Considering the impact of overseas costs, the value of the scheme is more likely static in future years, so £1.4bn saved to date and on course for, say, £4bn saved
- 2024 – £9bn projected v £7.6bn actual
- 2026 – £11bn projected
- 2027 – £11.9bn projected
However, there is still £340m lost due to error and fraud, with the SME projection of error and fraud down from 14.5% to 10%.
What has been achieved?
I fear that the changes to the scheme to rebalance and reduce fraud have now left us with a “so-what” scheme. What are we actually trying to achieve? Because one thing is certain, business confidence has been hit in an area that historically gave companies a drive, reward, and incentive to keep innovating. If 40,000 businesses no longer make a claim, even taking out the fraudulent, this sends a message that it’s just not worth the hassle, and what was once the silver lining for HMRC is yet another gloomy cloud.
What’s next?
We need to consider that the changes under the merged scheme, particularly overseas and subcontracting/contracting out, have not come through yet. It would be a fair assumption that overall R&D spend will come down because of the overseas restriction. There will be a further increase in RDEC for larger companies as they take more ownership of the intention and contemplation of how they utilise the services of SMEs.
This is now the perfect window to double down on R&D tax relief and turn it into the growth lever that we so desperately need. The scheme is rightsized, the concern of fraud and unsustainable volume has reduced, so please, HMT, send the signal that this is an investment for growth. Moreover, that it’s meant for all innovating businesses, and let’s encourage those businesses to take their share of the £7.6bn on offer.
