Why SMEs shouldn't turn their back on R&D tax relief

HMRC’s recently published statistics on R&D tax relief offer an insight into how the incentive is being utilised by businesses. The figures for the financial year 2023/24 reveal several key headlines, notably that SME claims have declined.

This is a concerning trend. At ForrestBrown, we partner with many SMEs and firmly believe that R&D tax relief remains a powerful tool for innovative businesses of all sizes. With the right partner, SMEs can continue to access this valuable incentive, enabling them to unlock significant potential.   

RDEC overtakes SME relief for the first time

One striking headline is that relief claimed under the RDEC scheme (£4.41bn) surpassed the total for the SME scheme (£3.15bn) for the first time. An increase in the RDEC rate is partly responsible, but other factors are likely at play.

These include recent changes to the incentive, an increased administrative burden and heightened compliance environment. Any, or a combination of these factors, may have deterred SMEs from claiming. The net effect is a 31% drop in SME claims and an even steeper 45% decline in first-time SME claims.

A decline in SME claims is something that we highlighted as a risk last November and expect to see consolidated in next year’s statistics. This will be when the effect of the introduction of the merged scheme will be fully realised.

In the meantime, it’s important to reiterate that while the incentive has seen a period of unprecedented change, it remains a valuable tool for innovative SMEs. Businesses should not be deterred from claiming.

Factors deterring SMEs from claiming

A combination of factors has added complexity to the R&D claims process in recent years.

Loss-making SMEs (non-intensive) hit by a decrease in rate

The first is the merging of the SME and RDEC schemes to create a new unified scheme for all R&D tax relief claims. This resulted in a decrease in the headline rate for loss-making SMEs from 33.3% to 16.2%, though loss-making SMEs that meet the R&D intensity threshold of 30% (i.e. spending 30% or more of total business expenditure on R&D) are eligible for a higher payable credit rate of 14.5%. This takes the effective rate of relief for R&D intensive SMEs up to 27%. Profit making SMEs can benefit from a rate of up to 16.2% post 1 April 2024 (down from 24.7% pre-1 April 2023).

New rules, new requirements

Alongside rate changes, the rules for claiming have changed too. Businesses need to be mindful of new requirements for claims that include externally provided workers and contracted-out R&D.

It’s a lot to keep in mind, even for accountants with an understanding of R&D tax relief. In our 2025 Accountant Survey, for example, over three quarters (77%) said that they have had to invest in additional training to stay up to date with R&D tax relief changes.

Procedural changes

Procedural changes such as the introduction of the additional information form (AIF) and claim notification have also added an extra administrative layer to claiming. Both processes are nuanced and failure to properly adhere to them could result in losing the right to claim in a financial year.

Our Accountant Survey highlighted the scale of the issue. More than three quarters of respondents stated that they have seen clients unable to make an R&D tax relief claim due to failure to notify HMRC under the claim notification requirements.

HMRC enquiries and compliance

The heightened compliance environment, which has resulted in an uptick in the number of enquiries from around 1% to a peak of around 20% is the other factor that might deter SMEs from claiming. Many are now opened at random and it can be a difficult process to navigate independently.

While we support HMRC’s efforts to weed out error and fraud, we remain concerned that legitimate SME claimants may be disproportionately put off claiming owing to the possibility of being caught in HMRC’s compliance net.

Reasons for SMEs to claim

SMEs form a core part of the government’s strategy for driving long-term economic growth and R&D tax relief remains a key tool to support that. It provides SMEs with essential funding to reinvest in the business to accelerate productivity and innovation.

Regardless of whether that funding is invested in equipment to support the next big project or used to recruit more staff, it will have a spillover benefit to the wider economy. Employment might rise or industry knowledge sharing and collaboration might improve, increasing the UK’s competitive edge.

Research published by HM Treasury in November 2021 supports this. It found that for each £1 of tax relief claimed, as much as £2.70 additional R&D investment is generated.

Rates remain beneficial

The rates of relief available to SMEs, while below their previous levels, remain beneficial, particularly for those R&D intensive businesses that qualify for the enhanced rate.

AIF and notification seamless processes with a specialist adviser

Procedural hurdles such as the AIF and claim notification can be managed with the help of a specialist adviser. They will keep on top of key deadlines and ensure that the correct documents are submitted to HMRC at the relevant times.

Peace of mind around enquiries

A good adviser will also ensure that claims are robust and will offer specialist enquiry support should HMRC open an enquiry into a claim. This gives businesses the peace of mind that a claim can be defended and that the day-to-day stress of managing a HMRC enquiry will be absorbed by a specialist.

How ForrestBrown can help

As the UK’s leading R&D tax relief adviser, ForrestBrown has a strong track record of supporting SMEs and is ideally placed to advise businesses on the new rules. We offer expert, end-to-end claim support, which ensures that procedural milestones are met, risk mitigated and claims optimised.

We draw on the skills of our tax, accounting, legal and industry-experienced technical experts to manage the claims process and have a specialist enquiry support service should HMRC open a random enquiry into a claim. This provides SMEs with reassurance, enabling businesses to navigate the new claims landscape with confidence.

Continue to benefit with the right support

While claiming R&D tax relief isn’t challenge free, it plays an important part in supporting growth and shouldn’t be discounted by SMEs. With the right support, claiming remains beneficial and an established mechanism for reinvesting in R&D.