By Shenal Wijetunge, Tax Partner and R&D Specialist at Dow Schofield Watts
Despite rising levels of innovation spending across the UK, many mid-market firms continue to miss out on the benefits of R&D tax relief. This is concerning, given that the relief is a cornerstone of the government’s innovation policy and is specifically designed to encourage businesses to push the boundaries of science and technology.
Innovation as a Strategic Imperative
Digital transformation is no longer discretionary but essential. Research by Dow Schofield Watts shows that 58% of firms now allocate between 11–20% of their annual budgets to digital transformation, while 60% cite artificial intelligence (AI) as their top investment priority over the next three years.
This investment is not merely about modernisation but about competitiveness and resilience in a volatile global environment. Half of midsized firms now view technology as the primary lever for operational efficiency and long-term sustainability.
And yet, despite this clear appetite for innovation, a significant proportion of the mid-market is not accessing the R&D tax reliefs available to them.
R&D Tax Relief as a Cornerstone of Innovation
R&D tax relief is designed to reward companies that are investing in innovation, covering activities from developing new products to improving internal processes through technology. In many cases, investments in areas such as artificial intelligence, cloud computing, cybersecurity, or systems integration may qualify if they involve challenges that a competent professional could not readily solve.
Why Are R&D Claims Lagging?
Two barriers dominate. First, awareness: many firms remain unclear about which projects genuinely qualify under HMRC’s definition. Second, fear of HMRC scrutiny.
Unfortunately, this fear has been amplified by widespread fearmongering. Some advisers and commentators have used the recent compliance changes as a platform to promote themselves, often overstating the risks and creating a culture of alarm. While HMRC’s increased scrutiny is designed to reduce fraudulent claims and improve standards, the narrative in the market has too often focused on risk rather than opportunity.
For SMEs and mid-sized businesses already navigating digital transformation, grant applications, and supply chain challenges, the result is predictable: many are deciding not to claim at all. This is compounded by persistent misconceptions, with some firms still believing that R&D tax relief is reserved for pharmaceuticals or pure software companies. In reality, HMRC’s guidance (CIRD80500) makes clear that attempts to resolve scientific or technological uncertainties even if unsuccessful can qualify.
Why Underutilisation Matters
The underuse of R&D tax relief has real consequences for growth. Mid-market firms investing heavily in digital initiatives but failing to leverage available incentives are limiting their reinvestment potential and, in many cases, falling behind competitors who do claim.
Many modernisation projects such as building advanced analytics platforms, integrating complex systems, or automating decision-making require solving genuine technological challenges. These are precisely the types of activities HMRC designed the scheme to support.
Despite this, HMRC has reported a 20–25% fall in claims. Crucially, this decline reflects increased compliance activity and the fear narrative surrounding it not a drop in innovation. The danger is that fear-based messaging will continue to discourage legitimate claimants, leaving the mid-market structurally disadvantaged.
How Can the UK Boost R&D Claims?
Three measures would help ensure that mid-sized firms make full use of the relief:
1. Better education and messaging
The current narrative around R&D tax relief is skewed towards risk. Too often, advisers use compliance changes as a way to promote themselves, spreading alarm instead of clarity. This has created a culture of fear that discourages businesses from claiming. What is needed now is balance. Business leaders should be given clear, consistent information supported by practical case studies about what genuinely qualifies and how to claim responsibly. The conversation must shift from fear to opportunity.
2. Access to specialist advic
Not every adviser is an R&D specialist. Firms need advisers who can assess eligibility against HMRC’s definition, build claims that clearly document the scientific and technological uncertainties, and defend those claims if challenged. Robust advice helps businesses claim with confidence, rather than hesitation.
3. Integration into business strategy
R&D tax relief should be built into the investment case at the outset of major projects. Treating it as part of the return on innovation ensures it is not overlooked or treated as an afterthought.
Reinvesting in Innovation to Drive Growth
With firms already allocating up to a fifth of their budgets to digital transformation, and with AI leading the charge, now is the right moment for the mid-market to claim the support available to them.
R&D tax relief is not a loophole. It is a carefully designed policy tool to reduce the financial risk of tackling complex technological problems.
By allowing fear to dominate the conversation, many firms are holding back from claiming. By contrast, those who take a balanced, well-advised approach can reinvest, scale faster, and compete more strongly on the global stage. For the UK economy, encouraging more of these robust claims is essential to driving long-term innovation and growth.
