HMRC's R&D tax relief crackdown worked. The question now is what comes next?

After the 2008 financial crisis, regulators clamped down hard on the banking sector. New rules and requirements were a necessary response to a system that had proven itself capable of enormous damage. But over the following decade, government and regulators concluded those settings had been left too tight for too long, and since 2021 they have moved, deliberately, to recalibrate.

 

There is a comparison to be made between how the regulatory response panned out in this instance and HMRC’s R&D tax relief scheme. From around 2013-14 onwards, it became clear that gaps in oversight and a growing market of unregulated advisers had left the R&D tax relief scheme vulnerable to fraud, error and abuse. The subsequent four-year campaign against abuse of the scheme has worked. By HMRC’s own measure, estimated fraud and error have fallen from 9.9% in 2022-23 to a projected 5.3% in both 2024-25 and 2025-26.

 

But new research from RCK Partners suggests the correction has gone further than intended, not just discouraging fraudulent claims, but also legitimate SMEs from undertaking research and development.   

 

Having made significant progress on compliance, policymakers now face a different challenge: ensuring the regime still gives businesses the confidence to invest, experiment, and grow. While fraud and error rates can be measured, the innovations that never happen and the roles that are never created are much harder to count.

 

The SMEs caught in the correction

Abuse-tackling reforms did more than make the regime harder to assess. They also reduced the level of support available to many of the businesses the scheme was originally designed to assist.

 

For more than two decades, policymakers deliberately gave SMEs greater support because successive governments recognised that innovation is not the same for a smaller business. A large company can spread risk across dozens of projects, while an SME is often making a much bigger bet. When cash is tight, one failed project can have a substantial impact on operations.

 

The reforms introduced since 2021 have substantially reduced the additional support historically provided to SMEs. Alongside tighter compliance requirements, many loss-making SMEs saw the effective value of support fall substantially – by around half – under the new merged regime.

 

But the conditions that led governments to prioritise SMEs in the first place have not disappeared. Growing businesses still face financing constraints, struggle to absorb failure, and must make difficult investment decisions with no guarantee of success, as innovation by nature is uncertain.

 

The cost of lost confidence

The research suggests the reforms to the scheme have had a marked impact on SMEs’ confidence to innovate. What’s more, it appears that this impact was also more considerable than HMRC anticipated; in HMRC’s recent accounts, it revised down its estimate of total SME R&D relief expenditure for 2023-24 by around £920 million, from £3.26 billion to £2.34 billion, suggesting that SME claiming activity was substantially lower than originally expected following the reforms.

 

The experiences reported by UK SME CFOs reinforce this concern. In an RCK Partners survey of 254 CFOs at R&D-active SMEs, 62% said they had reduced investment in R&D as a direct result of the reforms. Nearly a third have delayed projects; more than a third have made fewer technical hires than planned, and one in five have cancelled projects altogether.

 

That genuine, capable, research-intensive companies are cancelling projects. Shelving R&D work and cutting the skilled staff who lead it is very concerning. After all, SMEs are the UK’s future big businesses. Less innovation today can mean fewer patents filed, fewer new products developed, and fewer jobs created in three years’ time.

 

Having made the regime harder to abuse, the next task should be making sure it still encourages businesses to back up ambitious ideas in the first place.

 

Is HMRC signalling a different approach?

Tentatively, there is some good news which suggests a turning of the tide.

 

On 30 July 2026, HMRC published guidance encouraging SMEs carrying out R&D to consider whether they could benefit from the new Advanced Assurance scheme. That might sound like a small change, but it marks a notable shift in the tone. After years of the conversation centering on fraud, invalid claims and compliance checks, is the focus starting to return to what the scheme was designed to do: help businesses invest in innovation and growth?

 

There are other signs of change too, including a recent move towards named caseworkers and a more targeted approach to compliance. Together, they suggest recognition that the system needs to do more than stop bad claims – it needs to work for Britain’s genuine innovators.

 

From crackdown to confidence

The UK doesn’t have to choose between protecting public money and supporting innovation. It can do both by maintaining robust safeguards while ensuring legitimate businesses have the clarity and confidence to invest.

 

Having spent years restoring integrity within the regime, policymakers now have an opportunity to restore something equally important: the confidence to innovate.

 

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Peter Roscoe is Group CEO at RCK Partners

 

Main image courtesy of iStockPhoto.com and gorodenkoff