The Fall of SME R&D Claims
When HMRC released its 2025 R&D tax credit statistics on 30 September, one story dominated the numbers: SME innovation funding has declined sharply.
- 46,950 total claims in 2023/24, this is down 26% from 2022/23.
- SME-scheme claims down 31% (compared to 5% under RDEC).
- Even with the average claim size increasing by a third, the total qualifying R&D spend fell 1% to around £46bn, as the smallest of sub-£15k claims have vanished.
Fewer, better claims might look like progress, but it masks a worrying trend. Early-stage businesses who are often the lifeblood of UK innovation are dropping out of the system.
Compliance reform was overdue, but it’s come with a real cost for legitimate SMEs trying to do the right thing.
Why This Hurts UK Innovation
When we lose SME claimants we don’t just lose numbers on a spreadsheet, we lose future breakthroughs.
The UK’s most transformative technologies rarely begin in boardrooms; they start in small labs and co-working spaces, often with just a handful of people and a bold idea.
Think of:
- Speechmatics — developing accent-agnostic speech recognition from a small Cambridge team.
- Oxford Nanopore Technologies — pioneering handheld DNA sequencing.
- Sphere Fluidics — turning single-cell analysis into a global life-sciences platform.
- Wazoku and Agenor Technology — turning niche innovation tools into export-ready software success stories.
Each began life as an SME, fuelled by R&D tax relief in the critical years before commercial investment caught up.
And there’s hard data to back up why these firms matter. A peer-reviewed study by Athreye, Fassio & Roper in 2020 found that smaller firms are just as likely as large firms to generate patentable innovations. However they simply patent fewer in total because they can’t afford to. Among small firms who didn’t patent their most valuable innovation, 20% cited high costs as the reason, compared with 7% of medium and 3% of large firms.
The UK government’s own 2022 evaluation of its Small Business Research Initiative (SBRI) found that £340 m in awards generated over £1 bn in additional turnover, a benefit-cost ratio between 1.5 and 4.0. When you back SMEs, you get more impact through less funding.
Reducing that support may make the system look leaner on paper, but it risks dampening innovation in practice. The smallest firms are often the ones chasing genuinely novel ideas and taking the boldest technical risks. When they pull back the innovation pipeline inevitably tightens.
Who Fuels the Next Breakthrough?
If SME access to R&D relief continues to tighten, the next question is unavoidable: where will that lost innovation capital come from?
- Venture capital is an option — but it’s expensive and increasingly selective.
- Grant funding exists — but it’s fiercely competitive.
- Corporate partnerships help — but they’re rare, and can often the large company more than the start-up.
- R&D advance loans and revenue-based finance can bridge the gap — but at higher cost and with limited reach.
Each option plays a role, but none replicate the accessibility and scalability of R&D tax relief for early-stage innovators.
So we’re left with a paradox: the UK wants to be a science and innovation superpower, yet the mechanisms that fund the riskiest, most creative R&D are fading from reach.
As the landscape evolves, the challenge for advisors and policymakers alike is clear: how do we protect the integrity of the system without discouraging the very innovators it was built to support?”