Despite government support and generous tax incentives, many businesses still struggle to fully understand and utilise the government’s tax incentives. As a result, both ambitious startups and established enterprises in the UK face increasing challenges in preparing compliant R&D tax claims and demonstrating the value of their innovation.

When “innovation” becomes a buzzword

In many boardrooms, ‘innovation’ is used as a broad term for progress, but under HMRC’s guidelines, only specific R&D activities that meet defined criteria qualify for tax relief. However, when it comes to receiving R&D support, the ambiguity becomes a problem. HMRC defines R&D as work that seeks to achieve a scientific or technological advance and resolve uncertainty. Yet, this description often differs from how innovation is interpreted in practice.

Businesses may believe their product updates or process improvements are “too routine” to qualify, while others might incorrectly claim commercially-driven changes with no underlying technical challenge. As a result, many either overclaim, risking enquiries, underclaim, and miss out entirely, or do not make a claim at all.

The disconnect between policy and practice

This hesitation may be a core reason for the drop in R&D claims. According to HMRC figures, claim volumes dropped by 21% in 2022–23 compared to the previous year, with claims through the SME scheme alone falling by 23%. It will be interesting to see how these figures change once HMRC’s latest report is released in September, particularly as the UK Government has committed £86 billion to science and tech innovation by the end of this Parliament.

Part of the issue is increasing complexity. The merger of the SME and RDEC schemes last year introduced new rules, reduced relief rates for some, and restricted overseas R&D eligibility. Under the merged scheme, all businesses must claim at the same rate regardless of their size, which allows 20% as a taxable credit (one exception to this rule that is worth noting is that loss-making R&D-intensive SMEs are still eligible to claim more). The additional information form is now a mandatory part of all claims, which needs to be submitted in advance of the Company Tax Return. Due to these changes, companies now need to document and justify the eligibility of their R&D activities in detail.

What SMEs are getting right

Startups and scaleups, particularly those without legacy systems, often have an advantage in aligning their R&D activity with HMRC eligibility criteria. Their processes tend to be more agile, with clear project tracking and integrated documentation, making it easier to prepare compliant claims from the outset.

SMEs tend to integrate documentation into their workflows from the start, using organisational tools such as JIRA or Trello to track technical progress and provide audit-ready documents. Larger businesses, on the other hand, frequently deal with fragmented data, inconsistent definitions of innovation across teams, and walled R&D processes. That complexity raises the potential risk of filing a non-compliant claim, which is especially relevant now that 20% of all R&D tax claims are being investigated by HMRC, a figure that has increased fivefold since 2022.

The risk of doing nothing

Recent headlines have thrust into the spotlight the real-world risks of getting it wrong. In April 2025, The Times reported on a men’s health app facing a £400k clawback after HMRC rejected their R&D claim. The Financial Times followed with coverage of a founder calling the crackdown “a horrible situation” that punishes genuine innovation.

These headlines are not exceptions; they reflect a tightening compliance in the R&D credits landscape that requires businesses to work with clarity and precision in claims. Companies must be able to explain not only what they accomplished, but why it qualifies as R&D under HMRC guidelines.

So, what should businesses do?

The first step is to stop thinking of R&D relief as a year-end checkbox. Instead, view it as a strategic instrument to support innovation investment. That entails developing a clear internal understanding of what constitutes R&D and capturing that knowledge as part of day-to-day operations.

Second, match internal definitions of innovation with HMRC’s terminology. To ensure that the correct narrative is captured, cross-functional coordination is frequently required across finance, technical, and product teams.

Third, bring in the right support. At EmpowerRD, we use a hybrid approach – combining technical experts with a platform that tracks claimable activities in real time. This not only strengthens claims but also dramatically reduces admin burden for time-strapped teams. Our clients have seen up to a 170% increase in claim value and a significantly lower risk of HMRC enquiries as a result.

Why the government and the industry need to work together

For the UK to become a genuine global innovation leader, we need to remove the friction that’s holding businesses back. That starts with redefining and demystifying R&D, which will ensure that companies can identify, fund, and articulate their innovation efforts with confidence.

HMRC’s scrutiny is here to stay. But with the right definitions, tools, and processes, we can make sure businesses aren’t discouraged from innovating; they’re empowered to do more of it.

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