Research and Development Tax Relief Must Continue to Support UK Innovation

From high-growth technology companies to life sciences and advanced manufacturing, businesses investing in research and development (R&D) play a vital role in creating jobs, attracting investment and driving long-term productivity.

However, the latest HMRC statistics suggest that confidence in the UK’s R&D tax relief regime may be weakening. While measures to improve compliance and reduce fraud are important, there is growing concern that genuine businesses – particularly smaller, innovative companies may be stepping back from claiming the support available to them.

According to the latest figures, total R&D tax relief claimed fell by 2% in 2023/24. Qualifying R&D expenditure declined by 1%, while the total number of claims submitted dropped by 26%, with the steepest reductions coming from small and medium-sized enterprises (SMEs).

As the Government seeks to stimulate economic growth and encourage investment, maintaining an effective and attractive R&D incentive regime will be essential.

Why R&D tax relief matters

R&D tax relief is designed to encourage businesses to invest in innovation by helping to offset some of the financial risk associated with developing new products, processes and technologies. For many businesses, particularly startups and scale-ups these incentives can provide valuable cash flow that supports further investment, recruitment and commercial growth.

Commenting on the latest figures, Ele Theochari, Partner, said:

If the Government is looking to stimulate the economy, whether that is from home-grown talent or through the attraction of inbound international businesses looking to relocate, the R&D tax relief ecosystem must continue to support and incentivise startups.

Concerningly the 2023/2024 yearly R&D tax credit statistics showed a decrease across key areas: total R&D tax relief claimed was down 2%, total qualifying expenditure identified was down 1% and the total number of R&D tax relief claims submitted was down 26%.

The largest decrease in claimants came from small and medium-sized enterprises (SMEs) which decreased by 31%. While this is not particularly surprising taking into account the perceived targeting of SMEs by compliance teams at HMRC trying to root out fraudulent R&D claims, many genuine SME claimants have been put off claiming all together. There was a drop in claim values below £15k, with the SME scheme seeing the largest reduction in both volume and value of claims.

The wider economic picture

The UK continues to be one of Europe’s leading destinations for innovation investment. Venture capital funding remains strong, and the country continues to produce globally successful technology businesses.

Businesses heavily engaged in R&D are very valuable to the UK economy. In 2025, startups raised $23.7 billion, making it the third year on record with $23 billion plus in venture capital raised. The UK tech ecosystem is currently worth $1.3 trillion with half of that value belonging to private companies.

The UK has produced around 200 unicorns, which are private companies with a valuation of over £759 million ($1 billion.) The UK is the leader in Europe by the number of unicorns and $1 billion plus business sales. Fifteen UK unicorns and $1 billion plus exits have reached decacorn status, where a company has a valuation of over £7.43billion ($10 billion). ARM became the first UK centicorn with a value of over £74.32 billion ($100 billion).

These figures demonstrate the UK’s ability to create world-leading businesses. However, sustaining this success will depend on ensuring innovative companies continue to receive the support they need throughout their growth journey.

Could changes improve the system?

With the unified R&D relief scheme now in place, there is an opportunity to consider whether further refinements could encourage greater participation without compromising compliance.

To tackle this, the Government should rethink the overseas rules: under the unified schemes, overseas contractor costs are broadly disallowed except for narrow circumstances including geographical and regulatory reasons. This does not align with a globalised and mobilised economy that encourages utilising talent from around the globe. A potential alternative is to cap the amount of overseas spend allowed or broaden the circumstances that allow inclusion.

Ele concludes:

Profitable businesses should also be allowed to benefit from the more generous Enhanced R&D Intensive Support (ERIS) scheme rather than exclusively loss-making companies. Attitudes towards claimants with smaller expenditure values should be rethought, as less spend does not automatically lead to lower levels of qualifying research and development, particularly if the owners are bootstrapping the company.

What you should consider next

Whether you are an established business investing in innovation or an early-stage company developing new products or technologies, now is a good time to review your R&D strategy.

Businesses should consider:

• Whether current or planned projects could qualify for R&D tax relief
• Reviewing previous decisions not to claim, particularly if concerns around compliance were the main reason
• Ensuring robust documentation is in place to support any future claims
• Understanding how recent changes to the R&D regime could affect eligibility and the value of relief available
• Seeking specialist advice early when planning R&D investment or preparing a claim to maximise available support while meeting HMRC’s compliance requirements

With innovation remaining central to the UK’s long-term growth ambitions, businesses should ensure they understand how the evolving R&D tax relief landscape could impact future investment decisions.

Would you like to know more?

If you would like to discuss the above matter, please get in touch with your usual Blick Rothenberg contact, or Ele Theochari using the form below.