R&D tax credits have long been one of the UK's most effective incentives for innovation and a vital support for businesses. They're meant to encourage companies of all sizes, from tech startups to established manufacturing firms, to tackle genuinely challenging technical problems.
But the tempting offer of tax breaks for development have also attracted bad actors, with HMRC estimating the value of fraudulent R&D claims between 2020 and 2024 at 2020 £4.1 billion, which has led to an increase in denied or removed claims in recent years. With increased scrutiny from HMRC, and a tightening of rules, knowing how to successfully navigate your claim is more important than ever.
Here's your clear, practical guide to getting it right in 2025.
What's changed (and why you should care)
In April 2024, the UK simplified its R&D tax relief system, merging the previous SME and Research & Development Expenditure Credit (RDEC) schemes into a single unified scheme.
This was primarily a response to a surge in fraudulent claims and errors, and designed to make the process more streamlined.
- Under the new rules, there's now one clear, unified tax credit of 20% available to all eligible businesses.
- This tax credit is shown "above the line" in your accounts, meaning it's treated as a form of income that directly reduces your overall tax bill or increases your profit.
For small and medium-sized enterprises (SMEs) heavily involved in R&D (at least 30% of their costs), there's even greater support: an enhanced 186% deduction on qualifying expenditure. This special relief acknowledges how essential R&D credits can be for growth-focused small businesses, many of which rely heavily on this funding.
However, another big shift to note is that HMRC now significantly restricts claims involving overseas R&D. This change aims to refocus incentives towards UK-based innovation, driving job creation and economic activity here in Britain. While there are some limited exceptions (such as when geographical conditions or specific regulations require work abroad), the intention is clear: keep the bulk of your R&D activity in the UK if you want to claim tax relief.
What actually counts as R&D?
A common misconception is that R&D has to do with high tech or startup industries. In reality, it’s much broader. If you're solving complex technical problems, whether creating new software, enhancing an existing product, or even refining production methods, you might qualify. The key criteria are straightforward:
- Advancing Science or Technology: Your project must aim to achieve a genuine improvement rather than just routine adjustments.
- Resolving Uncertainty: You're solving problems that even experienced professionals don't easily have the answers for. It's about overcoming genuine technical challenges, not basic troubleshooting.
For example, if you're a software company developing an innovative algorithm, or a manufacturer experimenting to make materials stronger or more eco-friendly, you're likely engaging in qualifying R&D.
The important of documentation
With increased HMRC attention, thorough record-keeping is your best defence. Previously, HMRC's relatively relaxed approach led to exploitation of the scheme. Now, claims face far greater scrutiny, and businesses making errors can face stressful inquiries, penalties, and the uncomfortable task of repaying claimed credits plus interest.
- Carefully document your R&D activities.
- Clearly set out what your projects aimed to achieve, the challenges faced, and exactly how your work qualified as genuine R&D.
- Solid financial records linking each cost to specific R&D tasks are equally important, significantly reducing your risk of disputes later.
How to approach your claim strategically
Instead of viewing your claim as a cut-and-dry annual exercise, adopt a strategic mindset:
1. Confirm your eligibility early and clearly
Before investing substantial effort, make sure your work clearly meets HMRC criteria. This upfront clarity helps prevent unnecessary confusion later. Focus on demonstrating the genuine uncertainty and innovation in your work, which are key indicators HMRC looks for in assessing claims.
2. Precisely identify your qualifying costs
You can claim a wide range of expenses, from staff salaries, pensions, and NIC contributions, to subcontractors' fees, materials, and essential software or cloud services directly involved in R&D activities. Being precise here ensures you don't miss out on valid claims while preventing accidental overclaims that trigger HMRC investigations.
3. Craft a strong technical narrative
Good claims aren't just numbers. Explain your project clearly, showing why it meets the criteria for genuine R&D. Include the technical goals, challenges, methods, and results. A compelling narrative reduces the likelihood of misunderstandings, speeding up your claim's approval and reducing risks of follow-up inquiries from HMRC.
4. Submit claims correctly and on time
Use the supplementary form CT600L alongside your annual Corporation Tax return. For smaller firms or first-time claimants, HMRC’s Advance Assurance programme can provide extra certainty that your claim will be accepted, simplifying future processes and reducing stress.
Navigating HMRC scrutiny: avoiding common pitfalls
Recent experiences of small businesses highlight a few cautionary tales. For instance, some SMEs have faced significant challenges following HMRC's demands for repayments due to poorly advised or inadequately documented claims. These situations can cause severe cash-flow problems, reputational damage, and even threaten business survival.
To avoid these pitfalls:
- Choose advisors carefully: Unregulated tax advisors have been at the centre of recent R&D fraud scandals. Select an advisor with credible experience and transparent practices.
- Avoid exaggerated claims: Claims perceived as aggressive or overstated will attract scrutiny. Be realistic and careful in assessing your qualifying costs.
- Engage proactively with HMRC: If queries arise, respond promptly and openly. HMRC’s newly introduced voluntary disclosure facility can significantly reduce penalties for businesses proactively correcting mistakes compared to reactive disclosures.
Make R&D Tax Credits work for your business
R&D tax credits, despite recent changes, remain a valuable source of funding and encouragement for UK businesses aiming to innovate and grow. The recent changes might seem daunting at first, but understanding them clearly and approaching your claim strategically can turn these credits into a robust financial tool rather than a risky gamble.
At Haines Watts, our specialist advisors can help take the complexity out of the process, so you can make robust, fully compliant claims that protect your business, reduce your risk, and maximise the value of your innovation.
Not sure if R&D right for your business? We have created a free guide to help you understand what's involved in the process, all the latest changes in the rules, and what impact R&D claims could have for your business, so you can make an informed decision. Download the free guide here:
If you're ready to make the most of R&D tax credits in 2025, don't go it alone. Contact Haines Watts today to ensure your innovation receives the support it deserves, giving you the confidence and clarity to invest in your business's future.
