SME R&D Tax Credit Claims Drop Sharply
Newly released HMRC statistics reveal a steep decline in SME R&D tax credit claims, alongside a notable rise in compliance enquiries. The 2023/24 tax year saw a 29% fall in relief claimed under the SME scheme, while claims under the Research and Development Expenditure Credit (RDEC) scheme typically used by larger firms increased by 36%.
In total, 46,950 R&D claims were submitted in 2024, representing a 26% drop year-on-year. The most significant contraction came from SMEs, with smaller claims (worth under £15,000) falling more steeply than larger ones, leading to a 33% rise in average claim value.
Compliance Checks Tighten as HMRC Scrutiny Increases
The decline in SME participation has been attributed to tighter compliance requirements and an increase in HMRC enquiries into submitted claims.
Tax specialists note that the government’s clampdown on fraudulent or poorly evidenced claims has made it harder for smaller firms to qualify without comprehensive documentation.
“Businesses must now provide robust technical and financial evidence,” said a tax adviser familiar with R&D audits. “HMRC’s new approach is raising standards but it’s also discouraging smaller innovators who don’t have in-house tax expertise.”
Large Firms Hold Steady as RDEC Claims Rise
While SMEs faced difficulties, larger R&D-intensive companies continued to benefit from increased government support. Claims under the RDEC scheme grew by over a third, suggesting that the incentives remain attractive for major corporations with established compliance frameworks.
The Information & Communication, Manufacturing, and Professional, Scientific & Technical sectors accounted for 72% of total R&D claims and 71% of the total value claimed, maintaining their dominance across the innovation landscape.
Why Are Claims Declining?
The drop in R&D submissions among smaller firms reflects several key factors:
- Increased number of HMRC enquiries into claims
- Stricter requirements for technical documentation
- Ongoing uncertainty over new R&D rules
- Lower awareness of the merged R&D incentive scheme
In addition, the number of first-time claimants has decreased, suggesting reduced confidence among startups and early-stage businesses navigating the complex system.
What Qualifies as R&D?
To qualify for tax relief, projects must seek scientific or technological advancements, address technical uncertainty, and go beyond standard industry practices. Eligible expenses include staff wages, subcontractor costs, consumables, and related software or materials.
Typical qualifying projects span software development, engineering innovation, product design, and process optimisation.
Action Points for Businesses
Experts recommend businesses take the following steps to maximise claim success and minimise audit risk:
- Review innovation projects for qualifying R&D activity
- Keep detailed records of technical challenges and outcomes
- Link financial claims directly to eligible R&D work
- Submit claims early to avoid HMRC delays
- Work with a specialist adviser for documentation and compliance
HMRC Launches New R&D Eligibility Tool
In an effort to improve understanding and compliance, HMRC has rolled out a new digital tool that guides companies through key qualification criteria. The tool helps identify eligible projects and provides clarity on whether work undertaken qualifies as R&D.
HMRC advises that users consult a competent professional to ensure accurate responses and reliable claim preparation.
A Shift Toward Quality Over Quantity
While the overall number of R&D claims has fallen, experts say the quality of submissions is improving as businesses adapt to stricter rules. The next wave of statistics expected to include data from the merged R&D Expenditure Credit (RDEC) and Enhanced R&D Intensive Support (ERIS) schemes will likely reveal whether compliance-driven reforms have successfully refocused incentives toward genuine innovation.
