The reforms designed to clean up Britain’s £8 billion research and development tax credit scheme have worked rather too well.
More than six in ten businesses carrying out R&D have cut their investment as a direct result, according to new data from the advisory firm RCK Partners, with hiring frozen and technology projects cancelled outright.
R&D tax credits subsidise science and technology projects and cost the Exchequer roughly £8 billion a year. After sustained abuse of the scheme, HMRC placed far greater scrutiny on claims and pushed through a package of reforms, including reduced relief rates, which took effect in April 2023.
The consequences for smaller firms now look considerably sharper than intended.
RCK’s survey of more than 250 chief financial officers at R&D-active SMEs found that a third have hired fewer technical staff than planned, and one in five has cancelled innovation projects altogether. Thirty per cent were forced to take out loans to cover delays in relief payouts, and nearly as many fell back on directors’ personal funds.
Lord Hammond of Runnymede, the former chancellor and chairman of RCK Partners, called the findings “disconcerting” and urged policymakers to look “more carefully” at whether the scheme still works.
“It is a national priority to ensure that our SME sector, which is a critical part of the economy, is doing R&D,” he said. “The rates for small and medium companies were reduced at the same time as the regime was toughened up. The risks and the complexity increased while the rewards decreased.”
That combination, tighter enforcement layered on top of thinner relief, is what business owners will recognise. The compliance burden landed at precisely the moment the payoff shrank.
On its own terms, the crackdown has succeeded. The government says the cost of fraud and error fell from £1.34 billion in 2021-22 to £497 million in 2023-24, when an estimated 43,615 R&D claims were made by small businesses. HMRC’s most recent annual accounts also revised down total relief expenditure for 2023-24 by £920 million, from an initial £3.26 billion to £2.34 billion.
“It confirms that the impact on SME claims has been bigger than perhaps policymakers expected or intended,” Hammond said. “Policymaking is not an exact art. You develop a policy, you model it, you implement it. But if you’re sensible, you then go back and monitor what’s happened … and you tweak the model.”
Peter Roscoe, co-founder of RCK Partners, was clear that the enforcement itself is not the problem. “HMRC has done a really good job in getting the fraud and error rates down,” he said. The difficulty, he added, lies in the “inconsistencies” in the inquiry process, an issue familiar to any firm that has watched a routine query metastasise.
“Some inspectors ask targeted questions that are easier to answer, and then other times [a business] could get somebody who could go on for two years.”
A second problem is the advisory market itself. Roscoe pointed to online advertising, where claimants are “contacted out of the blue” by firms promising to deliver an R&D claim but often unqualified to do so. An investigation by The Times in 2022 revealed how the incentives were being targeted by rogue tax advisers encouraging dubious claims, few of which were checked by HMRC. Those same advisers, Roscoe said, have scared off genuine innovation companies from trying to access the scheme at all.
The chilling effect is measurable. Nearly a quarter of respondents said they had decided not to submit a claim at all, a figure rising to nearly half among firms with 250 to 499 staff. HMRC defines an SME as a business with up to 500 employees, which means the largest firms in that bracket, typically those with the most sophisticated R&D programmes, are the most likely to walk away.
The government is unmoved. “This report is based on a tiny fraction of UK SMEs,” it said. “The truth is the UK’s R&D tax relief schemes continue to provide vital support for business productivity and growth, with £8 billion of relief claimed in 2025-26.
“Our reforms mean that taxpayers’ money now goes towards genuine innovation, effectively tackling the high levels of error and fraud that have affected the schemes in previous years.”
Ministers have already floated mandatory pre-approval for R&D claims as a way of restoring certainty, and HMRC’s own review found non-compliance was higher where specialist agents were involved. Neither addresses the underlying arithmetic Hammond describes. With business investment appetite already at post-Covid lows, the question for the Treasury is whether a scheme nobody wants to claim from can still be called an incentive.
