If your business invests in developing new products, processes or technologies, you may be overlooking two valuable tax incentives: Research and Development (R&D) tax relief and the Patent Box.
While these schemes can significantly reduce your tax bill, HMRC has tightened the rules in recent months and years, especially for projects involving overseas teams. They are now paying closer attention to the accuracy of all claims.
In simple terms, this means you must demonstrate that your research genuinely pushes the boundaries of science or technology, maintain clear documentation, and work with reputable advisers to ensure compliance with the rules. By doing so, you can still benefit from these powerful reliefs and keep your company at the forefront of innovation.
These reliefs are effectively funded grants for innovation. Any business that has applied for grants in the past knows the level of detail required to make a successful application.
It may not come as a surprise that, historically, claims for R&D tax credits did not require the same level of information as a typical grant application. However, this has changed. More information is now required to support claims, ensuring taxpayers’ money is directed to the right places to fund innovation in the UK.
Which businesses qualify?
Many companies can potentially qualify for R&D tax relief if they are taking a risk by trying to resolve scientific or technological uncertainties.
In simpler terms, if you are seeking new and improved ways to make or do things – beyond routine changes – and can show that the outcome was uncertain at the start, you may be eligible.
Below is a summary of the types of projects and criteria that typically make a business eligible:
- Creating a new product with significantly improved features or performance, or enhancing an existing product by overcoming technical hurdles.
- Streamlining manufacturing steps, adopting cutting-edge technology in your workflow, or integrating new software in a way that goes beyond ordinary IT improvements.
- Writing code to solve complex problems, building novel algorithms, or tackling challenging user-experience issues that require experimentation and testing.
- Conducting lab-based experiments or field trials to explore how a material, system or piece of equipment behaves under specific conditions.
- What matters is that you are pushing the boundaries of your sector’s knowledge, not just applying standard methods already known within your industry. This involves identifying the industry baseline and then measuring how your work advances it, demonstrating a tangible and measurable innovation.
What are the rates?
Since April 2024, there has been a continued move towards a more streamlined approach to R&D tax relief, with a merged scheme combining the small and medium sized enterprise (SME) scheme and Research and Development Expenditure Credit (RDEC) for large companies, offering a maximum benefit of 16.2%. Previously, there were two schemes. In limited circumstances, such as R&D-intensive support, this benefit can be increased to up to 27%
for SMEs.
For a typical SME spending £100,000 on R&D, this could mean up to £16,200 in tax credits (grant funding). For intensive activities – where 40% of total company expenditure is on qualifying R&D – this amount could rise to £27,000.
Although SMEs and larger companies still face different rules in some aspects, both are under increasing scrutiny to ensure claims reflect genuine scientific or technological innovation.
Patent Box complement
The Patent Box regime offers a 10% Corporation Tax rate on profits derived from patented inventions. By combining properly structured R&D projects with patent protection, companies can significantly reduce their overall tax burden – though only if they meet the strict qualification rules around patent ownership and genuine development work.
Many businesses with patents fail to claim the tax relief when patents are incorporated into a product that is sold or used in a qualifying process, such as manufacturing or providing a service.
Heightened anti-fraud measures
HMRC’s Mandatory Random Enquiry Programme (MREP) data reveals that a significant proportion of SME claims contain errors or fraud, prompting tighter compliance checks:
- Enhanced disclosure forms and digital submissions make it easier for HMRC to scrutinise claims, ensuring relief is focused on genuine R&D. The Additional Information Form (AIF), introduced in August 2023, supports this effort.
- Claimed costs for overseas activities are closely vetted. Cost advantages or staff unavailability alone will not justify foreign-based R&D.
- Companies must identify a senior officer endorsing the claim and any agent involved in preparing it, deterring unscrupulous practices.
- HMRC has also expanded its specialist R&D compliance teams, opened more enquiries, and introduced new reporting requirements. Failure to meet these standards can result in extended investigations, penalties, or clawback of relief.
Working with a trusted adviser
The complexity and stricter oversight heighten the risks of errors, missed opportunities, or, worse, being caught in a fraud investigation. Collaborating with a qualified and transparent adviser can:
- Clarify whether overseas work meets HMRC’s exception tests.
- Ensure documentation aligns with the latest guidance, particularly for contracting-out arrangements.
- Safeguard against misinterpretation of new rules, thus minimising exposure to penalties.
Benefits still remain
Although the UK’s R&D landscape is more heavily regulated, significant tax benefits remain for innovative businesses that stay compliant. Recent overseas restrictions, revised contracting-out provisions, and stricter anti-fraud measures reflect HMRC’s commitment to channelling relief to authentic R&D projects.
At the same time, the Patent Box can still reduce Corporation Tax on profits from patented advances, further rewarding long-term innovation. By working closely with informed advisers and maintaining rigorous project records, companies can protect their claims, mitigate fraud risks, and fully leverage the UK’s generous R&D incentives.
Cottons Group has a newly appointed team of R&D experts dedicated to providing tailored support, ensuring claims are handled with great care and specialised expertise. Get in touch today to see how we can help your business maximise its R&D opportunities.
Find out more about Cottons Group at www.cottonsgroup.com
Tax Partner
Cottons Group
