Smart ways to fund innovation with grants and R&D tax

Funding Innovation Squeeze

The UK has overhauled its research and development incentives in recent years, culminating in the merger of the Research and Development Expenditure Credit (RDEC) and the more generous SME scheme into a single above-the-line credit system for accounting periods starting on or after 1 April 2024. This unified approach delivers a gross credit of 20%, but after corporation tax—typically at 25%—the net benefit settles around 15% for profitable companies or up to 16.2% for loss-makers, a marked reduction for SMEs that previously enjoyed enhanced deductions worth over 20% effective relief.

Loss-making SMEs with high R&D intensity can still access Enhanced R&D Intensive Support (ERIS), with the qualifying threshold eased from 40% to 30% of total expenditure, offering up to 27% repayable credit. Yet the overall impact has contributed to a sharp drop in claims: HMRC data for 2023-24 shows just 46,950 claims, 26% fewer than the prior year, even as total relief claimed held relatively steady at around £7.6 billion.

On the grants side, Innovate UK—the main public funder for business innovation—halted its popular Smart Grants programme from January 2025 to refocus on tailored packages, including new pilots launched in spring 2025 for startups addressing sustainability and scale-up needs. Other competitions remain active, with funds like Growth Catalyst combining grants and private investment, but the pause has narrowed immediate non-dilutive options at a moment when private investment remains cautious.

These shifts coincide with broader efforts to curb abuse and improve compliance, including mandatory additional information forms, pre-claim notifications for first-timers, and forthcoming requirements for tax advisers to register with HMRC from spring 2026. The result is a more controlled environment that prioritises high-impact projects but raises barriers for smaller or less experienced claimants.

Tensions arise between simplification and accessibility: larger firms and those with substantial R&D budgets often benefit from the merged scheme's inclusion of subcontractor costs and predictable credits, while smaller innovators face lower returns and greater scrutiny. Public investment in R&D remains robust—around £20.4 billion in 2025/26—but increasingly directed toward strategic priorities like clean tech and AI, leaving general innovation funding more competitive.