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Posted: Tue 11th Aug 2026
7 min read
A sweeping overhaul of Britain's research and development tax relief system has backfired, driving innovative small businesses to slash investment, cancel projects and make redundancies, new research reveals.
The reforms, designed to crack down on fraud, have instead created a bureaucratic quagmire that threatens to undermine the very innovation economy the government claims to champion, according to a survey of 254 finance chiefs at R&D-active SMEs commissioned by RCK Partners.
The research found 62% of companies have reduced R&D investment directly because of the changes, one in five have cancelled projects outright, and 35% have hired fewer technical staff than planned.
Three in 10 have been forced into redundancies or left posts unfilled due to delays in relief payments.
Lord Philip Hammond, chair of the board of directors at RCK Partners, speaking to The Times, warned:
"For the first time in more than 20 years, Britain has substantially weakened support for its most innovative small businesses, the very companies we need to drive growth.
"That a scheme meant to back them is instead driving them to cut research and skilled jobs should worry anyone who cares about Britain's future prosperity."
For Samit Biswas, founder of award-winning CareSafe, the consequences are deeply personal.
His company has developed a patented digital safeguarding technology that unifies health and social care data, a smartwatch with an embedded AI camera that provides continuous monitoring, fall prevention and geo-fencing for vulnerable patients.
The system, which, according to Samit, has attracted interest from NHS trusts and earned patents in the UK and US, uses technology to keep patients safe at home rather than in hospital.
"We never raised any money. It is all our own hard-earned money we invested," Samit told Enterprise Nation. "We took the risk to build something better for the future."
CareSafe's claims for R&D relief have been refused three times over three years, Samit said.
Initially, HMRC rejected the application because the company's SIC code listed it as a health and social care provider. Even after changing the code, the refusals continued with no clear explanation, Samit said.
"They're refusing it, but not giving any clear-cut clarification," said Samit, whose 25-person team operates across four UK locations serving 7,000 clients.
Samit, who spent 29 years in medical devices at companies including Medtronic and Johnson & Johnson, was a finalist in the New Entrepreneur of the Year category at the Lloyds Bank National Business Awards 2019.
CareSafe has been rated "good" by the Care Quality Commission for one of its locations, and its parent company, Health Tech Services Group Limited, won Lloyds Bank's Micro and SME Company of the Year award in 2024.
It's now expanding to Canada and Japan, without the R&D relief its UK-based innovation was supposed to qualify for.
"We have to invest in technology. We have to look for the future," Samit said. "At the same time, you constantly have challenges, but you can't just stop."
The research suggests HMRC's reforms have achieved the opposite of their intended effect.
While designed to curb abuse, the changes have created barriers for legitimate claimants while doing little to relocate overseas R&D activity back to Britain.
Just 5% of affected firms have brought work back to the UK, while 48% have simply stopped claiming relief and continued researching overseas, citing lower costs and better access to talent abroad.
Processing times have emerged as a central problem. Fully 72% of finance chiefs said HMRC's timetable for processing and paying claims made the relief too unreliable to include in financial planning.
Companies facing compliance enquiries waited almost four months on average for a substantive update, with 59% waiting between four and six months.
Another 70% said HMRC had paid a claim in the past five years, then later opened a compliance check seeking to reduce or recover that relief, creating profound uncertainty even for approved applications.
Three in 10 respondents have taken out loans to cover the gap left by delayed or denied payments, while 26% have seen business leaders use personal funds to keep projects alive.
HMRC's own figures underscore the scale of the pullback.
The tax authority revised down its estimated cost of SME R&D relief in 2023-24 to £2.34 billion from £3.26 billion, a reduction of approximately £920 million that suggests claiming activity has collapsed, the report found.
The reforms merged the previous SME and large-company schemes into a single regime, tightened advance notification rules, limited relief for overseas R&D and ramped up compliance checks.
While the old system was vulnerable to abuse and weak claims, critics argue the balance has now shifted too far towards compliance risk and administrative delay.
"In 2023, the principle that small and medium-sized businesses deserve more support was substantially weakened, with support for many SMEs more than halved," Rufus Meakin, R&D Tax credit specialist and adviser to RCK Partners, told The Times.
"This research suggests those unintended consequences are now becoming clear. Policymakers should consider whether the level of support given to SMEs is conducive to their ability to grow and innovate."
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