£175m decline in R&D tax relief claims by SMEs in the Midlands - report

There has been a marked fall in the number of SMEs in the Midlands making research & development tax relief claims, according to research by UK top 10 accountancy and advisory firm Azets.

The drop has prompted a specialist at the firm to warn that local businesses should use the valuable tax relief support - or lose it. 

Chris Dale (pictured), a partner with UK top 10 accountancy and advisory firm Azets, issued the warning after analysing the latest HMRC figures for 2023-24, with the previous year’s data in brackets for comparison.

There were 2,245 claims [3,350] in East Midlands, with a total cost of £120m [£215m]; Derbyshire and Nottinghamshire made 970 [1,395], Leicestershire, Rutland and Northamptonshire 980 [1,545] and Lincolnshire 295 [410]. Manufacturing led with 835 claims [1,160], followed by information & communication at 395 [545] and professional, scientific & technical at 320 [450].

There were 2,755 [4,145] claims made in the West Midlands with a total cost of £165m [£245m]; Herefordshire, Worcestershire and Warwickshire made 865 [1,250], Shropshire and Staffordshire 810 [1,195] and West Midlands 1,085 [1,700]. Manufacturing led with 1,045 claims [1,465], followed by information & communication at 520 [675] and professional, scientific & technical at 340 [485].

Chris said: “We are finding that the reduced benefit for SMEs, the latest compliance rules and relatively high time and cost investment to make an R&D claim are discouraging SMEs, in particular smaller SMEs.

“The decrease is concerning because the funding helps encourage businesses to develop new technologies, which in turn benefit the regional economy.

“Innovation costs are considerable, yet successful innovation, whether a new product, service or process, can generate new revenues and additional tax, which then offset the relief. Companies with genuine claims should not be put off.”

Claims by SMEs - which account for nearly 99 per cent of businesses in the UK - fell by nearly one-third compared to the previous tax year. Just under 47,000 R&D tax credit claims for 2023-24 were made overall, a fall of just over a quarter. Tax reliefs can be between £15 to £27 for every £100 spent on R&D, based on the government’s own figures.

Chris added: “The decrease, seen locally and across all the regions, is a crying shame because this kind of funding pays the people who help local businesses develop new and exciting technologies, which in turn grow the regional and wider economy. 

“Innovation costs considerable money – and a lot of innovation wouldn’t happen without taxpayer support because loss-making companies wouldn’t risk bankrolling further financial hits and profitable ones may fear being dragged into the red without recourse to public money to offset R&D outlay.

“Yet successful innovation can generate new revenues for businesses and create new taxes which more than cover what was put in by the taxpayer. Companies with genuine claims should not be put off.

“Worryingly, the government’s figures show that SMEs aren’t making as many R&D tax credit claims, with a decrease of nearly one-third compared to the previous year, and this is undoubtedly a direct consequence of the latest compliance rules. Indeed, the number of claims last year for R&D tax credits by scheme overall was the lowest since 2016-17.”

The amount of tax relief claimed through the SME scheme in the UK fell by 29 per cent, compared with the previous year, to £3.15 billion.

In comparison, claims for the larger companies’ RDEC scheme fell by 5 per cent, although the amount of relief claimed rose by 36 per cent to £4.41 billion.

According to HMRC, the provisional estimated amount of total R&D tax relief support claimed for 2023-24 was £7.6 billion, a decrease of 2 per cent from the previous year and corresponding to £46.1 billion of R&D expenditure, which was 1 per cent lower.

Regional allocation is based on the postcode of the company's registered address, which might not correspond to where the R&D activity takes place.

HMRC states that it has included estimates for claims not yet received, with revisions expected in next year’s publication.

The information & communication, manufacturing and professional, scientific & technical sectors account for the greatest volume of claims, making up 72 per cent of total claims and 71 per cent of the total amount claimed.

Earlier this year, Azets sent a wish-list to the Chancellor about making the application process less fraught with difficulty following a tightening up on bogus claims.

On behalf of the Chancellor, the then-Exchequer Secretary to the Treasury James Murray MP responded, stating that the government is “committed to periodically evaluating the R&D reliefs to ensure they are as effective as possible and underpinned by a credible, up-to-date evidence base”.

The reply included that the government “recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society”.

It was “committed to maintaining the generosity of the rates in both the merged R&D Expenditure Credit scheme and the Enhanced Support for R&D Intensive SMEs”.

The government stated that each £1 of public R&D stimulates between £0.41 and £0.74 of private R&D within the same year, and between £1.96 and £2.34 of private R&D over time.

In Azets’ letter to the Chancellor, attention was drawn to flaws in the claim system which have caused some significant cash delays for genuine claimants seeking to reinvest their credit on further R&D wages, prototypes and vital materials.

Mr Murray responded: “Merging the SME and RDEC schemes has simplified the system as there is now a single set of qualifying rules for the vast majority of R&D claimants.

"The enhanced support for R&D-intensive SMEs shares many of the merged scheme's rules, albeit with a different rate mechanism.

"The Government will continue to consider longer-term simplifications and improvements to the effectiveness of the reliefs.”