The changing landscape of R&D Tax Credits

Introduced in 2000, R&D Tax Credits have been the government’s flagship incentive to encourage innovation. Despite having its critics, the scheme is here to stay after recent reforms to the way the credit works, how it is enforced, and its generosity, sought to provide stability to the incentive and improve its credibility.

WHAT HAS CHANGED?

The most important change is the scheme's generosity, in particular the balance between SMEs and larger businesses. Before 2023, there were two schemes: the SME scheme, which was heavily skewed in favour of smaller enterprises with fewer than 500 employees, and the RDEC scheme for larger businesses. For accounting periods starting 1 April 2024, they have been replaced by a single merged scheme that offers around 15-16.2% benefit to all applicants, way down from the heady days of a 33% benefit to certain SMEs.

The other main area of change is compliance, with HMRC devoting significantly more resources to reducing the rates of fraud and error in the scheme, publicly aiming to open checks on up to 20% of all claims submitted. This initial heavy-handed approach in 2022-2023 created significant confusion and deterred genuine claimants, but it had the desired effect of pushing non-compliant claimants out of the incentive. This was seen in the number of claims being made falling from nearly 90k in 2020-21 to just over 45k in 2023-24. The administration and application process have also been made more rigorous to enable HMRC to improve its automated checking systems, which initially review claims on submission, thereby improving compliance rates. The most obvious example is HMRC’s requirement to notify them of a company’s intent to make an R&D claim within six months after its accounting period end.

HMRC's increased scrutiny of R&D claims in recent years has placed a greater premium on documentation. HMRC has invested heavily in compliance activity, and engineering firms, particularly those new to claiming, need to approach the process with rigour.

The good news is that the evidence required is not exotic. What HMRC expects is a coherent narrative that links projects to specific technological uncertainties, describes the work undertaken to resolve those uncertainties, and can be supported by contemporaneous records: project notes, design calculations, test results, internal emails, meeting minutes, and the like.

The practical challenge for engineering businesses is that much of this material already exists, scattered across project folders, site diaries, and engineers' inboxes. The task of the R&D claim is to organise, contextualise, and present that material in a way that maps onto HMRC's framework. This is where working with a specialist R&D adviser, ideally one with genuine engineering expertise rather than just tax knowledge, adds additional value.

Even if companies face an enquiry from HMRC, all is not lost; with specialist assistance, a seemingly insurmountable position can be rescued for a successful outcome.

Randd UK supported Association of Electrical & Mechanical Trades member companies, Rotamec and Covelec, through separate HMRC compliance checks, delivering successful outcomes on both.

In the case of Rotamec, HMRC’s ISBC department opened a compliance check in November 2025. randd prepared a comprehensive response covering the technical nature of the R&D projects as well as their inherent costs and financial aspects. The final closure notice confirmed the tax return did not need to be amended, meaning 100% of the claim was protected across all five projects, and all costs were accepted in full.

In the case of Covelec, the original claim had been filed by a previous adviser and was found to be fundamentally flawed. Following randd’s engagement and review, it became apparent that the evidence presented in support of the company's R&D activity was insufficient. randd held technical meetings with the company to properly understand the work undertaken. Four distinct qualifying R&D projects were identified, replacing the single project originally claimed. Following detailed correspondence and meetings with HMRC, all four projects were confirmed as allowable, securing an R&D tax credit for the client and turning an original flawed submission into a successful claim.

The R&D tax credit scheme exists to drive innovation-led economic growth, and engineering services sit at the heart of that agenda. For every pound of tax relief reinvested in staff development, better tools, or research into novel solutions, the industry becomes more capable, more competitive, and better placed to deliver the infrastructure the country needs.

The case for claiming, in other words, is not just financial. It is strategic.

For engineering services businesses considering an R&D claim for the first time, the process need not be daunting, and for those already claiming, now is the time to get a second set of eyes on the claim process to identify potential risks. A first step is an informal conversation with an R&D adviser to assess whether a qualifying activity exists within recent projects, or a health check of previously submitted claims to identify any potential risks.

It is also worth considering if any projects from the last four years involved technical challenges that could not be resolved by the straightforward application of established methods, whether engineers have spent time developing bespoke solutions for which no standard product or technique was available, if the company has invested time in testing, modelling, or iterating to resolve an engineering problem whose outcome was uncertain and if the company has records, however informal, of this activity. If the answer to any of these is yes, an R&D claim is worth investigating. And if the company hasn’t submitted a claim notification form to HMRC, then urgent action is required.

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This article appeared in Renew magazine. To read more or request your personal digital or print edition of Renew, click here.