The figures, released in September 2025, show that the total number of R&D tax relief claims for the 2023–24 tax year dropped to around 46,950 – a 26% decrease compared with the previous year. This corresponds to a total of £46.1 billion of R&D expenditure – 1% lower than the previous year.

Most notably, there was a sharp decline in claims from small and medium-sized enterprises (SMEs), whose participation fell by around 31%. In contrast, claims under the scheme for larger companies, known as RDEC, dipped only slightly. This divide signals more than just a statistical shift. It suggests that the UK’s smallest innovators, many of them startups and early-stage technology firms, are being pushed out of the system – that was designed to incentivise them.

This widening gap matters because it undermines one of the UK’s most powerful tools for stimulating innovation-led growth. SMEs and startups make up over 99% of the UK’s business population. Typically, a disproportionate amount of R&D is conducted by SMEs due to their ability to be agile and rapidly innovate compared to larger counterparts – this is often done on limited budgets with tight cashflow, with the R&D scheme being a lifeline for those businesses.

When those businesses stop claiming R&D tax relief, the UK risks losing momentum for innovation across the whole economy. If early-stage firms can’t engage with the scheme, or believe that it’s too complex or too risky, the UK risks losing a generation of innovators. That would slow the development of new products, services and technologies that drive productivity and the UK’s competitive growth.

Why startups aren’t engaging

There’s a number of hurdles that may be stopping these SMEs from engaging with the scheme. These typically fall into three brackets: complexity, confidence and time.

R&D tax relief claims have become increasingly scrutinised. This has been done by HMRC to reduce the amount of erroneous activity in the sector. Proactive engagement and transparency are key to maintaining a positive relationship with HMRC.  And while it’s having good outcomes broadly, for SMEs this can deter them from claiming. Many founders and finance teams worry they’ll come under increased scrutiny from HMRC, so they choose not to claim at all, even when they’re carrying out qualifying R&D. The combination of technical jargon, regularly changing guidance, and uncertainty about what counts leaves many startups feeling that the scheme is out of reach.

At the same time, HMRC’s compliance activity, while well-intentioned, can feel intimidating to smaller firms. The tone of correspondence is often formal and highly technical, and many business owners perceive the process as high-risk. Enquiries can be daunting for smaller businesses – as they can be a time sensitive process.

On top of this, preparing a compliant R&D claim takes time, and specialist expertise. At SME stage, businesses are often juggling multiple priorities like funding rounds, product development, and cashflow pressures, in turn pushing R&D claims down the priority list. The perceived effort and potential scrutiny can feel disproportionate to the reward. As a result, many genuinely innovative businesses are missing out on valuable support that could help them scale faster and reinvest in future development.

Bridging the gap

The challenge now for HMRC is to maintain strong compliance without closing the door on legitimate innovators. To bridge this gap, I believe we need to address the issues of complexity, confidence and time that SMEs are facing. In doing so, we can support them to engage more freely with the scheme.

To do this, HMRC has done well in recent years to encourage caseworkers to discuss claims with the claimant, and maintain strong communications. This allows for there to be a more open discussion and is something that I believe needs to be more widely adopted to provide clearer guidance and empower SMEs to feel confident in their claim.

Additionally, SMEs in particular need better access to broader expert support. High-quality advisers play a vital role in helping businesses navigate the technical and financial requirements of claiming relief. Engaging with an adviser around R&D tax relief will relieve some of the time pressures that SMEs are facing as they can gain a better understanding of the scheme more quickly, in turn enhancing their confidence in the process. By ensuring that SMEs have access to the same level of support as their larger counterparts, we can ensure that they aren’t left in the dark and missing vital opportunities to claim.

Why this matters

In order for the UK to continue to grow its innovation ecosystem, it’s crucial that smaller businesses are not left behind. R&D tax relief is one of the most effective tools available to support early-stage innovation, but its benefits will only be realised if SMEs can navigate the system with confidence. By simplifying guidance, providing accessible expert support, and empowering SMEs, we can ensure that startups and smaller firms are encouraged – rather than deterred – from claiming.

Closing this gap is not just about increasing participation; it’s about ensuring the UK has a strong pipeline of innovation to drive productivity, and maintain its competitive edge in a global economy.

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