The UK government’s R&D Tax Credit reforms coming in April 2025 will reshape how small and medium-sized enterprises (SMEs) access innovation funding. While the aim is to simplify the system, many SMEs will notice significant changes in how relief is claimed and in the impact on cashflow.
At Haines Watts, we know that for SMEs innovation isn’t just a buzzword, it’s often the difference between survival and growth. That’s why it’s vital to understand how the new rules will affect you, and what steps you can take to stay ahead.
What are R&D Tax Credits?
R&D Tax Credits are a UK government incentive designed to encourage companies to invest in innovation. Businesses can claim tax relief on qualifying research and development activities, reducing their corporation tax bill or, in some cases, receiving a cash repayment.
Until now, SMEs had access to their own dedicated scheme, the SME R&D scheme, while large companies mainly used the Research and Development Expenditure Credit (RDEC). But for SMEs seeking to claim R&D for accounting periods starting on or after 1 April 2024, this is changing.
The R&D Tax Credit Changes in 2025
The government is merging the SME scheme and RDEC into a single, simplified R&D scheme. Here’s what SMEs need to know:
1. A Unified Scheme for All Businesses
From April 2025, all companies, regardless of size will claim under one system. While this streamlines the process, SMEs will notice differences compared to the old, more generous SME scheme.
2. Changes to Relief Rates
The new scheme delivers benefit through a taxable credit. For SMEs, this could mean:
- Reduced cashflow advantage for loss-making businesses that relied on the payable credit.
- More predictable relief rates year-on-year, which may help with financial planning.
3. The R&D Intensive SME Pathway
To protect highly innovative small businesses, the government is introducing the “R&D intensive SME” category. If your company spends over 30% of its total costs on R&D, you’ll still be able to access enhanced relief. This is particularly relevant for sectors such as biotech, medtech, and technology startups.
4. Stronger Compliance Requirements
HMRC has tightened compliance and will continue to do so in 2025. SMEs must now:
- Submit a detailed Additional Information Form (AIF) before making a claim.
- Provide evidence linking costs directly to R&D projects.
- Nominate a senior officer to take responsibility for the claim.
5. Expanded Eligible Costs
The reforms also modernise what can be claimed:
- Cloud computing and data costs (AWS, Azure, Google Cloud etc.).
- Artificial intelligence and advanced mathematics.
- Certain overseas R&D activities, subject to restrictions.
Impact on SMEs
The reforms will reshape how different types of SMEs experience R&D relief. While the system is designed to simplify claims, the reality is that the effects will vary widely depending on your business model, sector, and stage of growth.
- For loss-making SMEs: The reduction in payable credits will be felt most strongly by early-stage or pre-profit businesses that rely on R&D relief for short-term cash injections. For these companies, the reforms could reduce working capital at a time when external funding is already tight. Proactive cashflow modelling, bridging finance, or seeking alternative funding routes may become necessary.
- For R&D intensive SMEs: Companies spending over 30% of their costs on qualifying R&D will still benefit from enhanced rates. This safeguard ensures that highly innovative businesses remain incentivised to push ahead with ambitious projects, but careful calculation is needed to prove eligibility.
- For cloud-based and tech-driven businesses: The inclusion of cloud computing, AI, and data-driven projects in eligible costs will expand the scope of relief. SMEs in SaaS, fintech, and data analytics may now claim for expenses that previously fell outside HMRC’s definition. This could increase claim values but only if supported by robust evidence of how these costs contribute to innovation.
- For first-time claimants: The compliance bar has been raised significantly. SMEs making their first claim must submit a claim notification within six months of their accounting year end to let HMRC know they intend to claim, an Additional Information Form (AIF), nominate a senior officer to approve the submission, and provide detailed evidence linking spend to R&D activities. Stronger record-keeping, including staff time tracking and technical documentation, will be critical to avoid delays or rejected claims.
Preparing Your Business for 2025
Here are five steps SMEs should take now to stay ahead of the R&D Tax Credit changes in 2025:
1. Review Your R&D Projects
HMRC’s definition of R&D remains technical and precise: work must aim to go above and beyond the existing baseline and resolve “scientific or technological uncertainties.” Go through your pipeline of projects and clearly separate qualifying from non-qualifying activities. Document the purpose, process, and outcome for each project, as this will form the backbone of a robust claim.
2. Check R&D Intensity
Calculating whether your R&D spend exceeds the 30% threshold is essential if you want to access enhanced relief as an “R&D intensive SME.” This isn’t just a year-end calculation, it’s worth monitoring throughout the year to help with planning decisions such as staffing, outsourcing, and investment in new technologies.
3. Strengthen Evidence and Records
HMRC’s new Additional Information Form (AIF) demands more detail than ever. Businesses will need to show how staff time, costs, and subcontracted work tie directly to innovation projects. Investing in better time-tracking systems, project logs, and financial controls now will reduce the risk of claims being challenged or delayed in the future.
4. Plan for Cashflow Adjustments
For many SMEs, R&D Tax Credits have been a reliable source of cashflow. With reduced payable credits under the unified scheme, you may need to re-forecast working capital, secure short-term financing, or adjust investment plans. Cashflow modelling under different scenarios will help avoid surprises and ensure continuity in innovation projects.
5. Seek Expert Guidance
With the reforms representing the most significant shake-up of R&D relief in years, the rules are increasingly complex and the compliance risks higher. Working with our R&D tax specialist can help you:
- Maximise claims by identifying overlooked costs.
- Ensure compliance with HMRC’s tightened standards.
- Model the financial impact of reforms on your business.
- Plan strategically for future innovation funding.
Navigating you through the process
The R&D Tax Credits reforms are designed to simplify the system and ensure long-term sustainability. For SMEs, the transition may feel daunting particularly if you’ve relied on the SME scheme in the past. However, the updated framework still provides strong support for innovation, especially for R&D-intensive businesses.
At Haines Watts, we work closely with SMEs to assess eligibility, manage compliance, and model the financial impact of the reforms. If you’d like to discuss how the changes affect your business, download our free R&D guide or get in touch with our team today.
