Comment: Why the R&D relief process needs urgent reform

In an era of unprecedented volatility in global affairs, technological innovation has become the critical linchpin of national security. Britain stands at a strategic crossroads, with defence spending projected to rise to 2.5% of GDP by 2027 - the biggest sustained increase since the Cold War. 

Vowing to turn the UK into a “defence industrial superpower” in her March 2025 Spring Statement, Chancellor Rachel Reeves has committed a minimum of 10% of the Ministry of Defence (MoD) equipment budget to “novel technologies, including drones and AI-enabled technology, driving forward advanced manufacturing production…, creating demand for highly skilled engineers and scientists, and delivering new business opportunities for UK tech firms and start-ups.” She has also committed an additional protected budget in the MoD for UK defence innovation and “a clear mandate to bring innovative technology to the front line at speed.”

The true measure of the success of this investment in defence innovation lies in the capacity of the UK’s engineering and technology sectors to transform technological potential into tangible defence capabilities - a directive that requires significant funding. 

The Innovation Funding Paradox: Systemic Barriers to Technological Progress

The UK's R&D Tax Relief scheme, a powerful yet underutilised mechanism for funding technological advancement, has been a cornerstone of UK’s innovation strategy over the last two decades. In 2020-21, HMRC awarded £6.6 billion across nearly 90,000 claims, with disbursements set to rise to £9.5 billion by 2027. The information & communications, manufacturing, and professional, scientific & technical sectors account for 66% of claims, with the lowest volume origination from the public administration, defence & social services sector.

While the scheme generates remarkable economic leverage - each £1 invested by the Treasury yields an additional £2 of R&D investment - it has created systemic barriers to technological progress for SMEs. The critical challenge is not a lack of funding, but a deeply flawed claims process that systematically disadvantages innovative SMEs.

The first barrier for SMEs is navigating the legal and regulatory landscape as they prepare a claim. HMRC's internal data reveals a stark reality: almost half of all claims made by SMEs are non-compliant - not through malicious intent (fraud was indicated in less than 10% of claims), but largely due to genuine misunderstandings of complex requirements.

The second, more difficult barrier, comes into play after a claim is submitted. The decision of whether a company undertook qualifying R&D rests with HMRC officers who are tax and compliance specialists, not scientists or engineers.

The inconsistency in HMRC's approach reveals a profound regulatory paradox. In the creative industries, HMRC readily defers to the British Film Institute for technical certification, acknowledging its own limitations in assessing artistic merit. Conversely, in science and technology - domains critical to national security - it maintains unilateral authority to challenge the technical merits of a claim. HMRC can in theory tell a physicist that their quantum computing breakthrough isn't real R&D - but draws the line at judging whether a film is "British enough" without the BFI. 

A Proven Solution

In response to these challenges, we at Grantica are calling for the incorporation of independent technical assessments in the R&D claims process. Scientific merit should be evaluated by domain specialists, not financial administrators. All R&D claims should be assessed and certified by independent chartered engineers or other relevant technical professionals before submission, ensuring both technical validity and financial compliance.

International R&D tax relief schemes demonstrate a commitment to technical expertise in R&D assessment. Germany has established a two-step R&D tax credit scheme that requires technical certification from independent experts before the government approves tax credits. Similarly, the United States employs a robust model through the Small Business Innovation Research (SBIR) program, where federal agencies utilize technical review panels comprising domain experts who assess technological merit and commercial potential. France has developed another noteworthy approach with the Crédit d'Impôt Recherche (CIR), which includes detailed guidelines and pre-assessment mechanisms that help companies understand qualifying research activities.

A Call to Action

Our partnership with the London Chamber of Commerce and Industry (LCCI) has amplified our  call for urgent change. The LCCI's recent Programme for Government includes R&D tax relief reform as an item requiring immediate attention, highlighting the need for standardised technical assessments of claims.

This is more than a technical policy adjustment – it is a mandatory intervention for our national security. In an age of hybrid warfare and rapid technological disruption, defence capabilities are intrinsically linked to the innovative capacity of SMEs. By dismantling bureaucratic barriers, we can accelerate the development of transformative technologies, from AI-driven surveillance to advanced secure communications systems.

The essential ingredients are present in the UK: funding, talent, and urgent national need. What’s missing is the political will to create a supportive ecosystem that bridges government support with private sector innovation. Reforming the R&D tax relief scheme is a strategic imperative for Britain's technological leadership and national security. The UK’s engineering sector has a pivotal role to play in bringing this issue to government attention and calling for reform as a matter of urgency.

Mohamed Dafea, CEng MIMechE, a Chartered Engineer and Member of the Institution of Mechanical Engineers, is co-founder of tax and funding advisory firm Grantica Ltd. For more information, visit grantica.io.