British startups are warning that aggressive recovery efforts by HMRC are putting their survival at risk, with some reporting major cash flow crises and even closure due to R&D tax credit clawbacks. The UK government’s push to combat fraud in the scheme is hitting legitimate innovators hard—creating financial uncertainty and draining resources across the early-stage ecosystem.
The R&D tax credit scheme, launched in 2000 to incentivise innovation, allows companies to claim tax relief or cash back on qualifying R&D expenses. But in response to what HMRC describes as “significant levels of error and fraud,” scrutiny has surged. In early 2024, HMRC increased the number of compliance checks from 1% to 20% of all claims. It also revealed that £4.1bn had been lost to abuse between 2020 and 2024.
Now, some startups say that even legitimate claims are being clawed back, creating sudden liabilities that threaten their financial viability. “The R&D tax credit clawback situation has been devastating for many startups,” says Sarah Malter, founder of Kapitalise. “We’ve seen companies forced to downsize or close altogether.”
Investigations Stall Funding Rounds and Force R&D Abroad
One founder, who requested anonymity, shared how a £50,000 clawback and a denied £150,000 future claim pushed their startup into liquidation. The company had been developing a new type of database system and believed it met HMRC’s innovation criteria. But because the tech built on existing systems, HMRC ruled it ineligible. “It couldn’t have come at a worse time—we were raising a round. An HMRC investigation during due diligence is a deal killer,” the founder said.
Another startup reported that it took over 700 hours of internal and consultant work to resolve a dispute with HMRC over £1 million in previously granted claims. “Startups don’t have the bandwidth to absorb a £1m hit or sink hundreds of hours into bureaucracy,” the founder said. “We ended up moving a large portion of our R&D overseas as a result.”
Frustration is also growing around HMRC’s customer service and communication practices. Startups say investigations can stretch for years with no opportunity for direct discussion. “Despite raising multiple complaints, we never got to speak with HMRC in the two years the investigation was ongoing,” another founder told Sifted.
Calls for Stability as HMRC Launches Advanced Clearance Consultation
While most founders and advisors agree that tightening oversight was necessary to weed out fraudulent claims, many now argue the system has swung too far. “The uncertainty of the scheme is one of the top three complaints we hear from founders,” says Jordan Sullivan, head of economic policy at Startup Coalition.
Rob Whiteside, CEO of advisory firm EmpowerRD, says the crackdown helped eliminate bad actors—but now “a new phase built on stability and predictability” is critical. There’s cautious optimism around HMRC’s March 2024 consultation on an advanced clearance process, which would give startups upfront assurance their projects qualify for relief. Feedback is open until late May, with a final proposal expected later this year.
In the meantime, the fear of clawbacks is leading eligible companies to walk away from the scheme. “Even startups who pass compliance checks are deciding not to file again because of how burdensome the process is,” Malter says.
For a country that wants to lead in innovation, that trend is alarming. “If the UK is to remain a global leader, the businesses building tomorrow’s solutions must feel supported—not second-guessed,” Whiteside adds.
