A sharp decline in the number of Scottish SMEs making R&D (Research & Development) tax relief claims has prompted a specialist to warn that businesses should use the valuable relief – or lose it.
Gemma Monaghan, a partner and head of R&D tax with top 10 accountancy and advisory firm Azets, issued the warning after analysing the latest HMRC figures.
She said: “We are finding that the reducing benefit for SMEs, latest compliance rules and relatively high time and cost investment to make an R&D claim is discouraging SMEs, in particular smaller SMEs.
In Scotland 2,785 claims were recorded between 2023-2024, a 35% fall on 2022-2023 (3570 claims). The value of claims remained relatively constant at £360m in 2023-2024 (£365m in 2022-2023).
“Smaller SMEs are being deterred from making R&D claims, which is concerning as they are often the drivers of innovation and creativity”, said Gemma Monaghan.
Across the UK the estimated amount of total R&D tax relief support claimed for 2023-24 was £7.6 billion worth £46.1 billion, a fall of 2% and 1% respectively on the previous year. Claims by SMEs fell by nearly one-third year on year. Nearly 47,000 R&D tax credit claims were made during 2023-2024, a fall of just over a quarter.
Ms Monaghan said: “The decrease is concerning because the funding helps encourage businesses to develop new technologies which in turn benefit Scotland’s 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.
According to HMRC, the provisional estimated amount of total R&D tax relief support claimed for 2023-24 was £7.6 billion corresponding to £46.1bn of R&D expenditure, 1% lower. Tax reliefs can be between £15 to £27 for every £100 spent on R&D, based on the government’s own figures.
Earlier this year, Azets sent a wish-list to the Chancellor about simplifying the application. The government reply stated that it 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” and 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”.
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.
Azets’ letter to the Chancellor drew attention to flaws in the application system which caused some successful claimants to pay back tax relief more than a year later after the money had been spent on wages, prototypes and vital materials. The government was urged to “listen” because the “current advanced assurance system is not working”.
Gemma Monagham specialises in advising Scottish businesses on the increasingly complex area of R&D tax credits, Patent Box and tax-efficient innovation investment.
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