16 April 2026
3 min read
HMRC’s Annual Report 2025-26 provides useful insight into the direction of R&D tax relief. With fraud and error projected to fall and no indication of further major reform, the regime may be entering a more stable phase, with HMRC’s focus increasingly centred on compliance, claim quality and robust supporting evidence.
HMRC’s annual report and accounts were published on the 9th July and provides a number of useful insights into the current direction of the R&D tax relief regime.
Collectively, they suggest that the period of major structural reform may be drawing to a close, with HMRC’s focus shifting towards improving compliance within the new framework rather than introducing further fundamental changes.
R&D tax relief remains a significant government incentive
HMRC estimates that R&D tax reliefs will cost around £8.0 billion during 2025-26, underlining that, despite tighter compliance measures, the government continues to invest heavily in encouraging business innovation.
The figures also demonstrate the transition to the post-April 2024 regime. Almost all support is now delivered through the Merged R&D Expenditure Credit (Merged RDEC) and the Enhanced R&D Intensive Support (ERIS) scheme, with the legacy SME and RDEC regimes now largely falling away.
HMRC believes fraud and error has reduced significantly
Perhaps the most notable development concerns HMRC’s assessment of fraud and error.
The department estimates that error and fraud within R&D tax relief amounted to 6.4% (£493 million) for 2023-24, split between 11.1% for the former SME scheme and 3.2% for RDEC. It also projects that this will reduce to around 5.3% in both 2024-25 and 2025-26, reflecting the anticipated impact of recent reforms.
HMRC attributes this improvement to a combination of measures introduced over the past few years, including:
An interesting feature of the report is that HMRC is not forecasting further reductions beyond the projected 5.3% level. While these are projections rather than measured outcomes, they may indicate that HMRC believes the most substantial gains from recent reforms have already been achieved.
Compliance may now be reaching a natural limit
The report invites a broader policy question.
Removing clearly ineligible or fraudulent claims is generally more straightforward than resolving claims that depend on technical interpretation of the legislation. As the remaining cases become increasingly judgement-based, further reductions in error may become progressively harder to achieve.
If HMRC’s projections prove accurate, the debate may increasingly shift from how much more fraud can be removed to whether additional compliance measures risk discouraging genuine innovation. That balance has always been central to the purpose of the R&D relief regime.
Revised expenditure figures point to lower SME activity
The Annual Report also contains revised expenditure estimates that are easy to overlook but potentially significant.
HMRC has reduced its estimate of SME R&D relief expenditure for 2023-24 by approximately £920 million, following the receipt of more complete claims data. While revisions of this nature are normal as claims continue to be processed, the scale of the adjustment suggests that SME claiming activity after the reforms was materially lower than originally expected.
The report does not explain why. Several factors could have contributed, including:
Whatever the underlying reason, the revised figures are consistent with HMRC’s earlier statistics showing a marked reduction in both SME claim volumes and total SME relief claimed following the recent reforms.
Compliance remains a major priority
There is nothing in the report to suggest HMRC intends to relax its approach to compliance.
More broadly, the department continues to invest heavily in compliance capability, including:
The report makes clear that improving claim quality remains central to HMRC’s wider objective of reducing the tax gap.
No indication of further major reform
Although the report and accounts are not necessarily the right place for any announcements, it’s encouraging to see no mention of anything ‘new’ – nothing about changes to the scheme, additional claimant obligations or eligibility rule changes. Instead, the report presents the merged regime as the new settled position, with HMRC’s attention turning towards effective administration, compliance and encouraging taxpayers to submit higher-quality claims.
Overall assessment
The Annual Report suggests that the UK’s R&D tax relief regime may be entering a more stable phase after several years of extensive reform.
HMRC believes that recent legislative changes and enhanced compliance activity have substantially reduced fraud and error, while revised expenditure estimates indicate that SME claiming behaviour has also changed significantly. Whether these developments ultimately represent the right balance between protecting public funds and encouraging private sector investment remains open to debate – particularly with a new Prime Minister and – probably – a new Chancellor about to arrive
For now, it seems that the era of rapid structural change appears to be giving way to one in which claim quality, robust technical analysis and comprehensive supporting evidence are likely to become the defining features of successful R&D tax relief claims.