What is the purpose of R&D tax credits?

Why does the government invest in R&D tax credits?

HMRC’s own guidance is explicit: the relief is intended to support and incentivise R&D by helping to overcome a market failure (a “positive externality”) that can otherwise lead to underinvestment in R&D. In plain English: society benefits from innovation, but individual businesses can’t always capture all of that benefit, so the government shares some of the cost to encourage more R&D to happen.  

That links directly to the UK’s broader ambition to raise economy-wide R&D investment. Government and parliamentary briefings have repeatedly referenced the goal of reaching 2.4% of GDP (and beyond) as part of the UK’s long-term growth and productivity plans.  

How the scheme works in 2026 and beyond

For most businesses, the main mechanism is the merged R&D tax relief scheme (merging previous RDEC and SME schemes):

• It’s an above-the-line, taxable expenditure credit
• The credit rate is 20% of qualifying R&D expenditure (different rates can apply for ring-fenced trades).
• The credit is treated as trading income, so it is liable to Corporation Tax (meaning the net benefit depends on the company’s tax position)
• If the credit is large relative to your payroll taxes, a PAYE/NIC cap can apply (with carry-forward rules where relevant)
  

What businesses actually use R&D tax credits for

At its best, the scheme helps businesses do more of the things that drive long-term performance:

• De-risking technical programmes: making it easier to back projects with uncertainty, longer payback periods, or higher failure rates
• Protecting cashflow: the credit can reduce Corporation Tax, and in some cases provide a cash benefit depending on circumstances and restrictions
• Maintaining competitiveness: funding iterative improvement, not just “moonshots”. Many R&D projects are about making meaningful advances in capability, performance, reliability, efficiency, or scalability
• Hiring and capability building: teams often reinvest into specialist staff, testing environments, software, data, and equipment that improve future delivery
  

The upside is real. HMRC’s latest published statistics estimate total support claimed through the schemes at £7.6bn for the 2023–24 tax year (with 46,950 claims in total).  

Why the rules have tightened (and why that’s not a bad thing)

If you’ve been around R&D claims for a while, you’ll have noticed a shift: more structure, more mandatory reporting, and a higher bar for evidence.

HMRC’s statistics show claim volumes have fallen sharply (down 26% year-on-year in the 2023–24 tax year), while the overall value moved only slightly. That pattern is consistent with a regime that’s prioritising claim quality and compliance.  

In practical terms, this is good news for genuine innovators: it rewards companies that can clearly show:

• What the technical uncertainty was;
• What was tried to resolve it;
• How costs map to the qualifying work, and;
• That the story is backed by contemporaneous records
  

Key tips for claiming R&D tax credits

A positive incentive still needs discipline. Common avoidable pitfalls include:

• Trying to claim for “innovation” that isn’t scientific/technological (commercial novelty and design creativity aren’t automatically R&D)
• Over-claiming cloud/software without sensible apportionment and a clear link to the qualifying activity
• Messy subcontracting and delivery chains, especially where work happens overseas (restrictions apply)
• Treating the process as year-end admin rather than building a claim from project reality as you go
  

How to get the most value from the scheme

The best approach is:

1. Understand what R&D means internally, aligning with HMRC's definition for tax purposes
2. Define project boundaries early (what’s in and what’s out)
3. Capture evidence as part of delivery (iterations, tests, failures, decisions)
4. Track costs in a way you can defend (especially staff time, cloud/data, and subcontracted work)
5. Submit a claim that tells a story and describes your R&D in a way that HMRC can understand

If you want to explore R&D tax relief or other R&D incentives, our experts are on hand to guide you.