HMRC has reported a significant 21% drop in research and development (R&D) tax credit claims for the 2022/23 tax year. The number of claims fell to 65,690 from 83,240 in the previous year.
This decline has sparked concerns about the impact on innovation, particularly among small businesses. The increasingly stringent claim processing is discouraging many from applying.
Stricter Claim Processing
The decline in R&D tax credit claims has been linked to HMRC’s more stringent claim processing requirements. These new processes are reportedly discouraging small businesses from applying for the tax relief they are entitled to. The additional hurdles are seen as unnecessary and cumbersome.
The time-consuming additional information form, along with the need for first-time claimants to notify HMRC in advance, has created significant barriers. Many businesses are therefore missing out on valuable tax relief.
Impact on Small Businesses
Small businesses, in particular, are affected by these changes. They often lack the resources to navigate the complex new requirements, leading to a reduction in claims. Oza pointed out that HMRC’s overly cautious approach to eliminating fraudulent claims is hampering legitimate growth businesses.
This overly cautious approach is effectively stifling innovation by creating an environment where small businesses are either unable or unwilling to apply for the credits.
Economic Consequences
The reduction in R&D tax credit claims has broader economic implications. By discouraging small businesses from applying for relief, HMRC’s policies may inadvertently be stifling the UK’s economic growth.
Oza emphasised the importance of efficient processing of tax relief schemes for R&D to encourage innovation and drive economic growth. He warned that excessive red tape risks further hindering the UK’s already lagging R&D spend compared to international competitors.
Calls for Reform
There are increasing calls for HMRC to reform its approach. Industry experts argue that the current system is too complex and burdensome, deterring businesses from claiming the credits they deserve. Simplifying the process could make it more accessible and encourage broader participation.
By reducing the bureaucratic hurdles, HMRC could help foster a more favourable environment for innovation. This would allow businesses to focus on growth and development rather than navigating complex administrative processes.
Comparisons with International Competitors
The UK’s R&D spend already lags behind many international competitors. The additional barriers introduced by HMRC may further widen this gap. Oza highlighted the need for the UK to remain competitive in the global market.
Other countries with less stringent requirements for R&D tax credits often see higher levels of innovation and growth. By simplifying the process, the UK could strengthen its position as a leader in research and development.
Voices from the Industry
Nikhil Oza, Partner at UHY Hacker Young, has been vocal about the negative impacts of HMRC’s current policies. He argues that the stringent requirements are counterproductive and calls for a more balanced approach.
Oza noted, ‘Ensuring that R&D tax relief schemes are not bogged down by excessive red tape is crucial for fostering innovation and economic growth.’
The 21% drop in R&D tax credit claims highlights a pressing issue within HMRC’s current policies. There is a clear need for reform to remove unnecessary barriers and encourage innovation.
By simplifying the claim process, HMRC can help ensure that businesses have the support they need to drive growth and maintain the UK’s competitive edge in the global market.
