During World War II, small and medium-sized businesses played a critical role in supporting Britain’s war effort. They adapted quickly, innovated boldly and stepped up when it mattered most.
Today, SMEs are once again being asked to contribute to the nation’s defence. The Government has pledged to raise defence spending to 2.5 percent of GDP by 2027, with plans to go further in the next parliament. The Ministry of Defence has also launched a dedicated support hub for SMEs, recognising that smaller firms bring not only agility and innovation but also deep technical expertise.
One of the most powerful tools available to small businesses investing in technology is R&D tax relief. For every £1 the Treasury spends, it generates an estimated £2 of additional private investment. But the current system is not working for smaller businesses. Unless we fix the system that is supposed to support SME innovation, we risk holding SMEs back at a time when the country needs them the most.
The scheme is not broken because of fraud, but because of complexity. Fewer than 10 percent of SME claims flagged by HMRC show any evidence of dishonesty. Nearly half of all SME claims are rejected because the claimant misunderstood what qualifies as R&D or how to present their work clearly. The problem is compounded because the HMRC officers assessing the claims are trained in tax compliance rather than science or engineering.
In effect, SMEs are being asked to explain their innovations to an audience that may not have the background to understand them. If the claim is not framed perfectly, it can be dismissed, even if the underlying work is genuinely innovative.
At Grantica, we believe there is a straightforward solution – independent technical assessments should be part of the claims process. Experts with relevant scientific or engineering knowledge should determine whether a project qualifies for tax relief. This would strengthen trust on both sides, helping good businesses succeed and giving HMRC more confidence in the claims they receive.
While we continue to advocate for this reform, there are actions SMEs can take right now to strengthen their own claims.
Start by getting your claim reviewed by a senior expert in your field. This should be someone who understands your work in detail and can confirm that it meets HMRC’s requirements. Ideally, they should have recognised qualifications and professional experience relevant to the R&D work you are undertaking.
Be sure to include clear details about the reviewer and their background in your claim. Explain why their opinion carries weight. It is also important to show that your R&D spend represents good value for money, both in terms of efficiency and impact.
To support SMEs looking to make R&D tax relief claims, we have created the Grantica R&D Framework (GRDF) 2.0 Toolkit. This is a free toolkit that helps SMEs prepare stronger and more compliant claims. It is the first public framework in the UK that brings structure and transparency to the R&D assessment process.
With the UK and its allies working to strengthen national security, removing barriers to innovation should be a national priority. SMEs have the ideas, the ambition and the skills. What they need is fair access to the funding that supports them.
Author Mohamed Dafea is co-founder of tax and funding advisory firm Grantica and a chartered engineer with a background in the defence industry. For more information, or to request free access to the GRDF 2.0 Toolkit, visit grantica.io.