Reforms aimed at reducing fraud and error in Britain’s £8 billion research and development tax credit system have been linked to a fall in investment among smaller businesses, according to new research.
More than six in 10 companies involved in R&D said they had reduced investment as a direct result of changes to the scheme, while others reported freezing recruitment or cancelling technology projects.
The findings come from advisory firm RCK Partners, which surveyed more than 250 chief financial officers at small and medium-sized businesses carrying out research and development.
The R&D tax credit system provides financial support for science and technology projects but has faced years of criticism over fraudulent and inaccurate claims. HM Revenue & Customs introduced tougher checks and reduced relief rates in April 2023.
RCK’s survey found that one-third of respondents had hired fewer technical employees than planned, while one in five had cancelled innovation projects. Thirty per cent said they had taken out loans to cover delays in receiving tax relief, and almost as many had used personal funds from company directors.
Lord Hammond of Runnymede, the former chancellor and chairman of RCK Partners, said the findings raised concerns about whether the scheme was still achieving its purpose.
“The rates for small and medium companies were reduced at the same time as the regime was toughened up,” he said. “The risks and the complexity increased while the rewards decreased.”
The reforms have succeeded in reducing the estimated cost of fraud and error. Government figures show the total fell from £1.34 billion in 2021-22 to £497 million in 2023-24, when small businesses submitted an estimated 43,615 claims.
HMRC also revised down its estimate of total relief expenditure for 2023-24 by £920 million, from £3.26 billion to £2.34 billion.
Hammond said the figures suggested the impact of the reforms on smaller businesses may have been greater than policymakers expected.
Peter Roscoe, co-founder of RCK Partners, said HMRC had made progress in reducing fraudulent claims but criticised inconsistencies in the way enquiries were handled.
He also raised concerns about unqualified advisers promoting R&D claims and said some businesses had been discouraged from applying because of the growing complexity and uncertainty surrounding the process.
Almost one-quarter of businesses surveyed said they had decided not to submit a claim. The figure rose to nearly half among companies employing between 250 and 499 people.
The Government defended the reforms, saying the R&D tax relief schemes continued to provide important support for productivity and growth. It said £8 billion of relief was claimed in 2025-26.
Ministers have considered mandatory pre-approval for some claims as a way to give businesses greater certainty. However, concerns remain that tighter controls and reduced financial support could discourage genuine companies from investing in innovation.
The debate comes as business investment remains under pressure, raising questions about whether a tax scheme can continue to encourage research and development if companies increasingly decide not to use it.
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