 tax credits by SMEs decreased by almost a third in 2023-24, official figures show. ){kind=link}
Claims for research and development (R&D) tax credits by SMEs decreased by almost a third in 2023-24, official figures show.
The data from HM Revenue & Customs (HMRC) shows the overall number of claims by businesses were down 26%, with a 31% drop in claims from SMEs.
The report is the first to include data affected by the change in R&D tax relief rates for the SME and R&D expenditure credit (RDEC) schemes as part of the government’s reform of R&D reliefs.
The RDEC scheme was introduced in April 2013 for large companies. The SME R&D scheme was introduced in 2000 and allows smaller companies to claim a deduction from corporation tax liability based on their enhanced R&D expenditure or to claim a payable tax credit if the company is loss making.
At the 2022 Autumn Statement the government announced a decrease of in both rates. The enhancement rate was decreased to 86% and the credit rate to 10%.
The data for 2023-24 shows that the amount of tax relief claimed through the SME scheme fell by 29% compared with the previous year to £3.15 billion, while the amount of relief claimed through the RDEC scheme increased by 36% to £4.41 billion.
Commenting on the data, Sara Brigden, managing director at ForrestBrown, said:
“Today’s data highlights the real impact of recent R&D tax relief reforms, with total claims now at their lowest since 2015-16. First-time claims from SMEs have seen a drastic 45% fall, driven by a combination of reduced relief rates and increased administrative effort, which together act as a de facto de minimis.
“While SMEs face increased friction with the recent reforms, larger businesses have benefitted from higher rates of return and have taken an increased share of the relief (47%) – although the number of RDEC claims has also dropped, albeit by a much smaller amount. The increased RDEC rate makes large, more risky projects more viable and gives greater planning certainty.
“The sharp drop in SME claimants is no surprise. Many small businesses now face a more complex and time-consuming claims process for reduced benefit – and for some, the return simply isn’t worth the effort.
“Today’s data raises an important question: will these changes discourage small businesses from investing in R&D, or push them to seek alternative sources of non-dilutive funding? While recent reforms have had a welcome impact on reducing error and fraud, we would caution against any further changes that risk undermining R&D investment. Doing so could detract from the core – and positive – purpose of the incentive: to drive private sector innovation.”
For accounting periods beginning on or after 1 April 2024, a new merged scheme R&D expenditure credit (RDEC) and enhanced R&D intensive support (ERIS) replaced the old RDEC and small and SME schemes.
Enhanced intensive support is available to loss-making R&D intensive SMEs.