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As we build up to the Chancellor’s Autumn Budget on 30 October, the next in our series of articles explores whether introducing a minimum spend requirement for R&D tax reliefs could address some of the issues facing the regime and help boost investment and innovation in the UK economy.

The abovementioned ‘issues’ in the R&D tax relief regime are well documented. In recent years the regime has seen its fair share of abusive practises and claimant error alongside an explosion in the number of claims at low levels of expenditure. Recent government efforts may have tackled the worst of this excess (and recent HMRC statistics offer a glimmer of hope in this respect), but could the reintroduction of a de minimis expenditure rule for R&D expenditure help to further reduce fraud and error levels and create a more sustainable regime that is fit for the future?

When introduced in April 2000, the small and medium-sized enterprise (SME) R&D tax relief regime required a minimum spend of £25,000 per year. In 2003 this was lowered to £10,000 per year and in 2012 the de minimis was abolished completely. There were good arguments for this. It seems discriminatory towards SMEs for one, especially when seeking to incentivise entrepreneurship and innovation. After all, every billion-pound unicorn started life as a start-up – why restrict R&D tax relief to only those spending over a specified amount? It also has a negligible effect on the overall Treasury budget, given such claims are by definition small in value, so why not spend a little in the hope that it generates a future behemoth?

The counterargument has two main (and persuasive) features. Firstly, basic reasoning would suggest that it may be difficult to be undertaking genuine, eligible R&D activities at such low levels of expenditure. R&D has a specific statutory definition for tax purposes set out in published guidelines. Companies must be seeking an advance in the overall knowledge or capability in a field of science or technology. Is it realistic to expect that such criteria could be met if only spending less than, say, £25,000 on such lofty goals? Even if it is accepted that such claims are largely compliant, the economic benefits may be marginal when considering current levels of tax relief (broadly equating to £5,000 at such an expenditure level) compared to the costs of compiling and processing the claim for claimants and HMRC.

Secondly, by restricting smaller claims below a de minimis, this may lead to better utilisation of HMRC resources and help further reduce fraud and error. , published in September 2024, show that despite the recent crackdown on fraud and error, over half of the more-than-65,000 claims made annually are for less than £30k in tax relief. Furthermore, HMRC’s fraud and error estimates published in 2023 showed that include less than £50,000 of R&D expenditure. That’s a lot of claims to process and check for compliance effectively. The analysis also suggested that the smaller the amount being claimed for, the more likely it was to be non-compliant. For claims where expenditure was less than £10,000 (8,300 in total) over 75% of the value of the claims was non-compliant. This would suggest that reintroducing a de minimis spend level could be much more effective than any compliance programme could hope to be. 

On the assumption that the Chancellor agrees, at what level should she set the de minimis? The original level of £25,000, equates to approximately £45,000 in today’s money. The lower value of £10,000 would now equate to almost £20,000. Clearly if set too low it becomes a pointless exercise, but too high and it risks stifling genuine innovation. Perhaps £25,000 remains a reasonable level. This could still exclude thousands of claimants who may otherwise benefit but concerns over whether the majority of such claims are genuine in the first place mitigates this risk somewhat. On balance, it feels like a small price to pay for a more sustainable regime that continues to incentive UK innovation into the future.