The number of small and medium-sized enterprises (SMEs) claiming R&D tax credits in the UK has seen a significant decline. During the 2022–2023 tax year, there was a sharp 23% drop in claims among SMEs, raising concerns about the future of this critical incentive for innovation. In this blog, we’ll explore why this drop occurred, the impact on innovation, and what steps can be taken to make the scheme more accessible for businesses in the future.

What Are R&D Tax Credits?

R&D tax credits are a government initiative designed to encourage businesses to invest in innovation. By offering tax relief or even a cash refund, the scheme helps companies offset some of their R&D expenses. However, recent data reveals a decline in the number of SMEs taking advantage of these credits, which has led to questions about the effectiveness of the scheme.

The Decline in R&D Tax Credit Claims

According to HM Revenue and Customs (HMRC), the total number of R&D tax credit claims dropped by 21% in the 2022–2023 tax year, with SMEs seeing an even sharper decline of 23%. While the total amount of tax relief claimed increased slightly to £7.5 billion, the number of businesses benefiting from the scheme has fallen. This indicates that while fewer companies are claiming, those that do are claiming larger amounts.

The decline in SME claims represents a significant shift, especially since R&D tax credits have long been an essential tool for fostering innovation in the UK’s small business sector.

The Role of the Additional Information Form (AIF)

A major factor behind the drop in claims is the introduction of the Additional Information Form (AIF) in August 2023. This new form requires businesses to provide more detailed documentation when submitting R&D claims. The intention behind the AIF was to reduce errors and combat fraudulent claims, but it has made the process more complex, particularly for SMEs that may lack the resources to handle the additional administrative burden.

For many small businesses, the increased compliance requirements have become a barrier, deterring them from applying for R&D tax credits. This has led to a noticeable drop in claims as smaller companies struggle to navigate the more complicated process.

Impact of R&D Tax Credits on Innovation

R&D tax credits have played a key role in supporting innovation across the UK, particularly for SMEs. By providing financial relief, these credits enable businesses to take on high-risk, high-reward projects that might otherwise be too costly. For many small businesses, the tax relief has been crucial for expanding their product offerings, exploring new technologies, and staying competitive in the market.

However, with fewer SMEs taking advantage of this scheme, there are concerns that the decline in claims will stifle innovation in the UK’s small business sector. Without access to these crucial funds, many companies may be less willing to invest in R&D, ultimately slowing the pace of innovation and harming the UK’s economic growth and global competitiveness.

What’s Next for R&D Tax Credits?

The government has acknowledged the challenges posed by the introduction of the AIF and the subsequent drop in claims. During the Autumn Budget announcements, Chancellor Rachel Reeves confirmed that no major changes would be made to the R&D tax credit regime in the near future. This decision aims to provide stability and reassurance to businesses as they adjust to the new requirements.

For SMEs, this news offers some relief as they can focus on meeting the new AIF requirements without the added concern of further regulatory changes. However, many experts argue that the R&D tax credit system still needs to be simplified to make it more accessible to smaller businesses, which are often the driving force behind innovation in the UK.

Conclusion

The significant decline in the number of SMEs claiming R&D tax credits for the 2022–2023 tax year underscores the challenges faced by small businesses in navigating an increasingly complex claims process. While the introduction of the AIF aimed to address fraud and errors, it has inadvertently created barriers for businesses with limited resources.

The government’s decision to maintain the current scheme without further changes provides stability, but it’s crucial that the process is made simpler and more accessible for SMEs. By doing so, the UK can reignite its innovation engine and ensure that small businesses continue to play a key role in driving the country’s growth and competitiveness.