Innovation has never been more essential, or more misunderstood.
As UK businesses race to stay ahead, they are under increasing pressure to innovate while justifying every pound spent.
Under these circumstances, redefining research and development (R&D) has become a necessity.
Head of Technology at EmpowerRD.
Despite government support and generous tax incentives, many businesses still struggle to fully understand and utilize them.
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 blanket term for progress, but under HMRC guidelines, only specific R&D activities that meet defined criteria are eligible for tax relief.
However, when it comes to obtaining R&D tax credits, ambiguity becomes a problem. HMRC defines R&D as work that seeks to achieve scientific or technological progress and resolve uncertainty.
Yet, this description often differs from how innovation is interpreted in practice.
Businesses may believe that their product updates or process improvements are “too routine” to qualify, while others may falsely claim commercially driven changes without any underlying technical challenge.
As a result, many people either overclaim, risk inquiries, underclaim, and miss out, or do not claim at all.
The difference between policy and practice
This hesitation may be the main reason for the decline in R&D claims. According to HMRC data, claim volumes are set to fall 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 following the release of HMRC’s latest report in September, especially as the UK Government has pledged £86 billion for science and technology 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, reducing relief rates for some and restricting foreign R&D eligibility.
Under the merged scheme, all businesses will have to claim the same rate regardless of their size, allowing 20% as 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 must be submitted before the company tax return.
Due to these changes, companies are now required to document and justify in detail the merits of their R&D activities.
What SMEs are doing 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 are more agile, with clear project tracking and integrated documentation, making it easier to prepare compliance claims from the start.
That being said, many of these companies are already embedding digital tools into their workflow. Cloud-based platforms, issue-tracking software like JIRA, and collaboration tools like Notion or Confluence allow engineers and product teams to capture technical progress in real time.
This creates audit-ready documents by default instead of a manual process at year-end. On the other hand, larger businesses often deal with fragmented data, inconsistent definitions of innovation across teams, and walled-off R&D processes.
This complexity increases the potential risk of filing a non-compliant claim, which is particularly relevant now as 20% of all R&D tax claims are being investigated by HMRC, a figure which has increased fivefold since 2022.
risk of doing nothing
Recent headlines highlight the risks of getting it wrong in the real world. In April 2025, The Times reported the Men’s Health app had lost £400k after HMRC rejected their R&D claim.
The Financial Times, following coverage of a founder, called the action “a terrible situation” that punishes genuine innovation.
These cases highlight how digital-first companies, even those with advanced products, are not immune from HMRC scrutiny. The technical nature of the work should be documented in a way that is consistent with policy, not just the business situation.
These headlines are no exception; They reflect stringent compliance in the R&D credit scenario which requires businesses to act with clarity and accuracy in claims.
Companies must be able to explain not only what they have achieved, 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, see it as a strategic tool to support innovation investment. This involves developing a clear internal understanding of what constitutes R&D and incorporating that knowledge as part of day-to-day operations.
Second, match internal definitions of innovation to HMRC’s terminology. Cross-functional coordination is often required across finance, technical, and product teams to ensure that the right narrative is captured.
Third, invest in the right systems. Embedding structured documentation into technical workflows is no longer optional.
By using a platform that captures code commitments, technical discussions, and problem-solving in real-time, businesses create a verifiable path to their innovation efforts. This not only strengthens claims but also reduces the risk of non-compliance.
Why do government and industry need to work together?
For the UK to become a true global innovation leader, we need to remove the friction that is holding businesses back. This starts with redefining and demystifying R&D, which will ensure companies can confidently identify, fund, and articulate their innovation efforts.
Technology also plays a role here. By standardizing digital record-keeping and encouraging the use of integrated tools, the process of capturing and reporting R&D can be far more transparent.
Government guidance that reflects how technical teams actually work will help bridge the gap between policy and practice.
HMRC’s investigation will remain here. But with the right definitions, tools and processes, we can ensure that businesses are not discouraged from innovating; They are empowered to do more.
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