Innovation is the lifeblood of businesses today, but it’s also a term that’s often misunderstood. As UK companies strive to stay ahead, they’re under pressure to innovate while justifying every penny spent. But here’s the catch: not all innovation qualifies for R&D tax relief. And that’s where things get tricky.
The Innovation Muddle
In boardrooms across the UK, ‘innovation’ is a buzzword that can mean anything from a minor product tweak to a groundbreaking tech advance. But when it comes to claiming R&D tax credits, HMRC has a very specific definition. It’s work that seeks a scientific or technological advance and resolves uncertainty. Yet, this often differs from how businesses interpret innovation in practice.
Many companies either overclaim, underclaim, or don’t claim at all due to this disconnect. And it’s no surprise that R&D claim volumes have dropped by 21% in 2022β23, with SME claims falling by 23%.
Navigating the New R&D Landscape
The merger of the SME and RDEC schemes last year brought new rules, reduced relief rates for some, and restricted overseas R&D eligibility. Now, all businesses claim at the same rate, allowing 20% as a taxable credit. But loss-making R&D-intensive SMEs can still claim more.
The additional information form is now mandatory for all claims, and companies need to document and justify their R&D activities in detail. This is where many businesses, especially larger ones, struggle with fragmented data and inconsistent definitions of innovation.
The Risk of Doing Nothing
Recent headlines have shown that even digital-first companies aren’t immune to HMRC’s scrutiny. A men’s health app faced a Β£400k clawback, and a founder called the crackdown “a horrible situation” that punishes genuine innovation. These cases highlight the need for businesses to align their technical work with HMRC’s guidelines, not just their commercial positioning.
So, What Should Businesses Do?
1. Rethink R&D Relief: Stop treating it as a year-end checkbox and start seeing it as a strategic tool to support innovation investment.
2. Align Internal Definitions: Match your company’s view of innovation with HMRC’s terminology. This often requires cross-functional coordination.
3. Invest in the Right Systems: Embed structured documentation into technical workflows to create a verifiable trail of your innovation efforts.
Government and Industry: Working Together
For the UK to become a global innovation leader, we need to remove the friction holding businesses back. That starts with redefining and demystifying R&D. Technology can help standardize digital record-keeping and make the process more transparent. And government guidance that reflects how technical teams actually work would help close the gap between policy and practice.
HMRC’s scrutiny isn’t going away, but with the right definitions, tools, and processes, businesses can be empowered, not discouraged, to innovate.
