Reforms to the UK’s R&D tax relief scheme, introduced to stamp out widespread fraud and error, are suppressing the very innovation they were designed to protect, according to research by tax advisory firm RCK Partners.
It found that more than 8 in 10 (82.1%) chief financial officers in agri-tech companies said changes to the R&D tax relief regime have led them to reduce investment in R&D. More than half (53.3%) stated they have delayed an R&D project as a direct consequence of the changes, compared with 29% of R&D-active SMEs overall.
Taking in companies outside of agriculture, more than a third (35%) have hired fewer R&D or technical staff than planned, three in ten (30%) firms have made redundancies or left posts unfilled.
The changes, phased in from 2023, merged the previous SME and large-company schemes into a single, less generous regime, introduced onerous Advance Notification requirements for many claimants, restricted relief for R&D carried out overseas and sharply increased HMRC compliance checks on claims.
Rufus Meakin, R&D tax credit specialist and advisor to RCK Partners, said: “For more than twenty years, Britain deliberately gave its small and medium sized businesses more support, because successive governments recognised they face the greatest barriers to innovation.
“This research suggests those unintended consequences are now becoming clear. As policymakers continue to evaluate the effectiveness of the regime, they should consider whether the level of support given to SMEs is conducive to their ability to grow and innovate.”
“The reforms have also failed to deliver one of the Government’s chief aims: new restrictions on overseas R&D costs were intended to bring research back to the UK. Instead, just 5% of affected firms surveyed have relocated work to the UK, while 48% have abandoned their claims altogether and kept their operations abroad. Firms that stayed overseas say the cut to relief rates made bringing work home uneconomic (32%), while others cite lower overseas cost and talent advantages as outweighing the relief now on offer.”
