The UK R&D tax credit reforms introduced under Rishi Sunak increased the RDEC rate to 20%, expanded eligible costs such as cloud computing and data, and introduced stricter compliance checks. The changes reduced SME claim volumes while increasing the value of larger company claims. The reforms aim to improve claim quality and encourage genuine innovation, but their impact on smaller innovators depends on future support, skills development, and access to funding.
Camellia Chan, CEO and Founder at X-PHY, comments on the UK’s commitment to R&D, that today’s Spring Statement made good on its promise to support business innovation by reforming R&D tax credits so they are more effective.
The UK government has taken a strong step to reshape how R&D tax credits support innovation. When Rishi Sunak introduced reforms in the Spring Statement, the goal was not only to adjust tax relief but to fix deeper issues in how businesses invest in research and development.
For years, the UK spent heavily on R&D incentives, yet business-led innovation remained weaker compared to global benchmarks. This raised an important question: if the support exists, why is the impact limited? The reform was designed to address this gap by improving efficiency, reducing misuse, and aligning support with real innovation.
Why the UK Changed the R&D Tax Credit System
Before the reform, many businesses used the system, but not all claims reflected genuine innovation. A large number of claims were either low-value or incorrectly filed. This reduced trust in the system and increased pressure on HMRC to tighten controls.
At the same time, the structure of the scheme did not fully support modern industries such as AI, data science, and cybersecurity. Many of these sectors rely on cloud computing and advanced data processing, which were not previously covered properly.
The government responded by redesigning the system so that it rewards real innovation, reduces incorrect claims, and reflects how modern technology businesses actually operate.
What Exactly Changed in the Reform
The biggest change came in how support is distributed between small and large businesses.
The SME scheme became less generous. The enhancement rate dropped, and the credit for loss-making companies was reduced. This directly lowered the financial return for many small businesses, making the scheme less attractive for those with limited budgets.
At the same time, the RDEC scheme became more valuable. The credit rate increased, which made it more appealing for larger companies and structured R&D teams. This created a clear shift in where most of the financial benefit now sits.
To balance this, the government introduced a category for R&D-intensive SMEs. Companies that invest a significant portion of their spending into research can still access higher support. This ensures that businesses deeply focused on innovation are not penalised.
Another important change was the introduction of stricter compliance rules. Businesses must now submit detailed information about their R&D work, including technical explanations and supporting evidence. HMRC has also increased scrutiny, making the process more controlled.
In addition, the reform expanded what qualifies as R&D. Costs related to cloud computing, data processing, and pure mathematics are now included. This directly supports industries working with AI, cybersecurity, and advanced software systems.
What the Latest Data Shows After the Reform
Recent data shows a clear shift in how the system is being used.
The total number of claims dropped significantly, especially among SMEs. Many smaller businesses stopped applying due to reduced financial benefits and more complex compliance requirements. However, the overall value of claims remained relatively stable.
This means fewer companies are claiming, but those that do are submitting larger and more structured claims.
At the same time, the value of claims under the RDEC scheme increased. This confirms that larger organisations are now gaining a bigger share of the benefits.
Another important change is the increase in average claim size. Smaller claims declined, while higher-value claims became more common. This shows that the system is now favouring businesses with clear, well-documented R&D activity.
Camellia Chan’s View on the Reform
Camellia Chan, CEO of X-PHY, supports the UK’s focus on strengthening innovation but highlights an important reality.
She emphasises that tax incentives alone cannot drive innovation. For the UK to become a leader in technology, businesses must also have access to skilled talent and strong execution capability.
In sectors like cybersecurity, there is already a clear gap between demand and available expertise. Even with improved tax support, innovation cannot grow without the right workforce.
Her perspective adds depth to the discussion by showing that policy enables innovation, but people make it work.
Where the Reform Works Well
The updated system works effectively for companies that already have structured R&D processes.
Large organisations, AI-focused firms, and cybersecurity companies benefit because they can clearly track their technical work, invest heavily in innovation, and manage compliance requirements.
For these businesses, the reform provides a more stable and predictable environment for planning long-term R&D investment.
Where the Challenges Exist
The challenges are more visible for smaller companies.
Startups and early-stage businesses often lack the resources to manage detailed documentation and compliance processes. When combined with reduced financial returns, this makes the scheme less accessible.
As a result, many small innovators may step away from claiming R&D relief, which could slow down early-stage innovation across the UK.
The Shift Towards a Unified System
From April 2024, the UK introduced a merged R&D scheme. This combines previous structures into a single system, making the framework more consistent.
However, while the structure is simpler, the process itself remains strict. Businesses still need to provide strong technical evidence and meet detailed compliance requirements.
This shows that the focus has shifted toward control, accuracy, and accountability rather than ease of access.
What Businesses Should Do Now
To succeed under the new system, businesses need to change how they approach R&D claims.
They must document their work from the beginning, clearly showing the problem they are solving and the technical challenges involved. Teams need to work together so that financial data and technical details align properly.
Businesses should also focus only on genuine innovation, as weak or unclear claims are more likely to be rejected.
Taking professional guidance can also help reduce risk, especially for companies that are new to the system.
Final Thoughts
The reform of the UK’s R&D tax credit system has changed how innovation is supported.
It has made the system more structured and aligned with modern industries, but it has also reduced accessibility for smaller businesses. The shift toward larger companies is clear, and this creates a challenge for maintaining a strong pipeline of new ideas.
The long-term success of this approach will depend on how well the UK balances efficiency with accessibility. Supporting skills, talent, and early-stage innovation will be just as important as funding itself.
