Innovation, the lifeblood of businesses, is more crucial than ever, yet it’s often shrouded in confusion. As UK companies strive to stay ahead, they’re under pressure to innovate while justifying every penny spent. But here’s the catch: many are struggling to understand and utilize research and development (R&D) tax incentives, leading to missed opportunities and compliance issues.
When “innovation” isn’t what it seems
In boardrooms across the UK, ‘innovation’ is a buzzword for progress. But when it comes to claiming R&D tax credits, the HMRC’s definition is more specific. R&D, according to them, is work that aims to achieve a scientific or technological advance and solve uncertainty. However, this often differs from how businesses interpret innovation, leading to misconceptions and incorrect claims.
Some companies might overlook their eligible activities, thinking they’re “too routine,” while others might claim commercially-driven changes without a technical challenge. This ambiguity results in businesses either overclaiming (risking enquiries), underclaiming (missing out), or not claiming at all.
The drop in R&D claims: A sign of confusion?
HMRC figures show a 21% drop in R&D claims in 2022–23 compared to the previous year, with SME scheme claims falling by 23%. This could be due to the hesitation caused by the disconnect between policy and practice.
Navigating the new R&D landscape
The merger of the SME and RDEC schemes last year introduced 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, requiring detailed justification of R&D activities. This complexity has increased the risk of non-compliant claims, with HMRC investigating 20% of all R&D tax claims, a fivefold increase since 2022.
Lessons from SMEs
Startups and scaleups often have an advantage in aligning their R&D activities with HMRC eligibility criteria. Their agile processes and integrated digital tools allow them to capture technical progress in real-time, creating audit-ready documentation.
However, larger businesses often struggle with fragmented data, inconsistent definitions of innovation, and siloed R&D processes. This increases the risk of filing non-compliant claims, as recent headlines about digital-first companies facing clawbacks have shown.
What businesses can do
1. Rethink R&D relief: View it as a strategic instrument to support innovation investment, not a year-end checkbox.
2. Match internal definitions: Ensure your understanding of innovation aligns with HMRC’s terminology.
3. Invest in the right systems: Embed structured documentation into technical workflows to create a verifiable trail of innovation efforts.
Government and industry: Working together
To make the UK a global innovation leader, we need to demystify R&D and ensure businesses can identify, fund, and articulate their innovation efforts with confidence. Standardizing digital record-keeping, encouraging integrated tools, and providing guidance that reflects how technical teams work can help close the gap between policy and practice.
HMRC’s scrutiny is here to stay, but with the right definitions, tools, and processes, businesses can be empowered, not discouraged, to innovate.
