Could HMRC lift R&D relief rates to match Ireland, Australia, Canada or the US?

The UK’s R&D reliefs have been through a huge overhaul in recent years; the SME enhanced expenditure credits and rates of relief were significantly reduced in 2023, and the headline support for loss-making SMEs is now lower than it has ever been. At the same time, several competitor jurisdictions have been making their own moves; Ireland has increased its R&D credit, whilst Australia and Canada still offer relatively generous offsets for many. So, the question deserves asking: Might Labour raise the generosity of UK R&D reliefs to “keep up” with those countries, and more importantly, should they?

Where the numbers currently stand

• UK: Following reforms, the R&D scheme now has a lower enhancement and a smaller payable credit at either 15% or 16.2% below the line.
• Ireland: R&D tax credit has been raised in recent years and is now commonly referenced at 30% for qualifying expenditure (with further policy tweaks currently under consideration).
• Australia: For many smaller companies, the refundable R&D offset can be equivalent to a >40% cash benefit (figures vary by turnover and company circumstances).
• Canada: The SR&ED programme continues to offer enhanced refundable credits for eligible R&D, with recent budgets expanding the expenditure limits for enhanced credits, offering 35% ITC & CCPCs

These headline differences show a stark difference between some of the World’s largest and most successful economies and arguably show the UK looks less “pro-R&D” on paper than most, at least by the simple metric of tax-credit generosity. But generosity is, in our opinion, only half the story.

The case for increasing UK R&D relief rates

1. Attract and retain mobile investment.
   Multinationals considering where to site R&D or scale up labs and product teams often evaluate effective marginal subsidies. Higher credit rates (and especially refundable ones for loss-making startups) can tip location decisions. If Ireland, Canada or Australia are perceived as more rewarding places to do R&D, we risk losing investment, jobs and opportunities from companies choosing not to establish or expand operations within the UK.
2. Support scale-up and deep tech.
   Many high-risk, high-reward innovations burn cash for years before revenue arrives. More generous, refundable R&D support helps bridge that perilous period wherein most small/start-up organisations will fail due to cash flow and encourages ambitious projects that deliver opportunities for the wider economy.
3. Signalling and industrial strategy.
   Raising R&D reliefs is a visible commitment to innovation policy. In a post-pandemic, green-transition era, signalling matters: firms and investors read policy signals when choosing long-term bets. The UK’s flip-flop attitude towards fiscal policy, the budget and political uncertainty all undermine our economic strength and further add risk and concern from foreign investors and those deciding where to base operations.
4. Counteract recent tightening and behavioural effects.
   HMRC statistics show R&D claim volumes and SME claims fell after the 2023 changes, while RDEC claims rose, suggesting the structure matters for different firms. A recalibration could restore access for SMEs and startups, signalling the UK government is also pro-small business, other than what appears to be pandering to those who have the ability (or the pockets) to lobby those policy decision makers.

The case against increasing rates
Every argument has both positives and negatives, and we are not naïve enough to suggest that increasing rates of relief within the UK does not come without risk.

1. Fiscal cost and credibility.
   Generous credits cost real money. The UK’s public finances remain under pressure: debt and borrowing numbers have been headline issues, and the Chancellor recently abandoned plans to raise income tax in a high-profile U-turn that highlights the fragile political capital and the need for fiscal credibility. Big tax giveaways risk undermining fiscal targets or forcing offsetting measures elsewhere.
2. Targeting and deadweight.
   Not all R&D spend is incremental; firms sometimes claim credits for activities they would have done anyway. Raising headline rates without sharpening targeting can deliver large amounts of “deadweight” public money that subsidises activity the private sector would have funded anyway.
3. Administrative complexity and fraud risk.
   Larger, more attractive credits can invite aggressive claims and disputes. HMRC has already increased enquiries; scaling up generosity without stronger compliance resources could increase fraud or create long legal fights that deter innovation rather than encourage it.

   No one wants to see repeats of Green Jelly Fish, RDI, Counting Kings, etc. However, it can also arguably be said that HMRC’s current guise of scrutiny and short-sighted policy changes, i.e. Advanced Notification (CNF), wherein they announced incorrect guidance initially and have affected thousands of companies’ abilities to claim R&D for 2024 & 2025 and have been equally damaging to the industry as those bad agents were.

4. Alternatives may be a better value.
   Public R&D grants, procurement-led demand, increased direct government R&D spending in priority areas, or targeted support for SMEs and pre-commercial scale-up might produce bigger social returns than an across-the-board tax credit increase.

The political context: why the Autumn Budget U-turn matters
When a government publicly reverses course on a headline tax rise, three things happen politically:

1. Room for manoeuvre narrows. With attention on restoring credibility (debt markets, ratings agencies, public confidence), the Chancellor is less likely to back a large, headline-grabbing tax cut or credit increase unless it’s revenue-neutral or offset elsewhere.
2. Stealth measures increase the chance of targeted giveaways. If broad income tax changes are off the table, the Treasury may consider targeted tax incentives (like R&D tweaks) as a politically cheaper way to support business. That makes a modest, well-targeted R&D tweak plausible even if large increases are not.
3. Timing and optics matter. Any increase will be judged against the government’s stated fiscal rules and recent reversals; large increases without clear offsets would be politically risky.

Put simply: a big, unfunded uplift in R&D credits looks unlikely right now, but targeted, fiscally costed adjustments (for example, improving the cash-payable element for loss-making SMEs, or raising certain caps) are feasible options the Treasury might prefer.

Practical middle paths

• Raise the payable credit threshold or speed up first-year payments (helps startups without changing headline enhancement rates).
• Targeted temporary uplifts in priority sectors (green tech, life sciences) with sunset clauses.
• Increase compliance and clarity to restore claimant confidence while keeping generosity stable.
• Introduce incremental increases tied to R&D intensity (higher % for firms that increase R&D intensity year-on-year).

Each of these options lowers deadweight and fiscal exposure compared with a blunt uplift for everyone.

In our opinion, it is all a nuanced bet…
A large across-the-board increase in R&D rates to match the most generous international jurisdictions looks politically and fiscally unlikely in the immediate term, given the government’s recent U-turn on income tax and the pressure on public finances.

That said, targeted, fiscally costed interventions, especially ones that help loss-making startups or focus on strategic priorities, are realistic and could be announced as part of a budget that wants to be seen supporting growth without endangering fiscal credibility. Our suggestion, as we wait for the 26 November budget, is to watch for specific signals in budget documents (consultations, caps, first-year payment rules and targeting language) rather than headline percentage hikes. This is where we feel we may see change.

Although with the uncertainty surrounding the wider budget, who at this stage could even hazard a guess?