Twenty-five years after their introduction, debate has reignited over whether R&D Tax Credits should be reserved for high-priority sectors or remain open to any company undertaking genuine R&D.
The government’s recent shift towards funding “strategic” investments in select technologies has brought that question back into focus.
Last week, on 30 October 2025, the Department for Science, Innovation and Technology announced a £55 billion long-term R&D package covering a range of technology areas.
The budget is to be spread across UK Research and Innovation, the Advanced Research and Invention Agency, the Met Office and the National Academies. Funding will support “frontier” fields such as quantum technologies, robotics, engineering biology, advanced materials and clean manufacturing, alongside projects in cancer diagnostics and next-generation scanners.
Government ministers described it as the largest real-terms rise in public R&D spending on record, optimistically claiming that every pound of public investment generates eight pounds in wider economic benefit and attracts twice as much private capital.
Science and Technology Secretary Liz Kendall proclaimed that, “Backing our best and brightest researchers and innovators is essential. Their ideas will create tomorrow’s industries,” a statement that sums up the government’s faith in its ability to pick technological winners.
Few would question the need for public investment in science, but the way it’s being directed is more open to challenge.
By channelling funding into a handful of politically favoured sectors, the government is signalling which kinds of innovation it values. That influence is already visible in the tax system, where language around “strategic priorities” has begun to change.
The risk is that an R&D scheme meant to support research and development wherever it happens starts trying to direct it.
A drift towards selectivity?
Some tax specialists have begun to question whether neutrality still makes sense. For example, influential commentator Dan Neidle of Tax Policy Associates has suggested that R&D relief should be confined to industries delivering the greatest public benefit and targeted, with the aim of “reducing the number of [R&D] claims by a factor of 10”.
His approach would be to “focus [R&D] relief narrowly on significant projects aimed at science and development innovation. The aim should be to provide more generous relief for bioscience, engineering and tech companies and no relief for anybody else”.
It’s an interesting idea, and in practice the government may already be moving in that direction.
The recent increase in HMRC R&D Tax Credit compliance checks suggests that some sectors are being treated as inherently less credible. In correspondence with the Chartered Institute of Taxation, HMRC confirmed that it undertakes “targeted activity” in trade sectors where it “does not generally see successful claims for R&D.” Its website lists examples that are “rarely eligible”, including care homes, childcare providers, personal trainers, wholesalers, retailers, pubs and restaurants.
Advisors now report that other sectors are facing increased scrutiny, including real-estate agents, textile manufacturers, construction firms and consultancy practices.
The logic appears to be that these industries have been heavily associated with inflated or bogus claims. Yet to treat whole industries as implausible sources of R&D risks excluding legitimate work. In construction, that could mean developing new materials and modular processes, while consultancy spans a wide range of software and systems innovation that could well qualify as R&D.
Even without formal policy change, a sector bias is creeping in through compliance practice, with HMRC using SIC codes to decide which claims it wants to examine, meaning risk models now determine what was once a universally applicable incentive.
A further sign of this shift is the creation of the Research and Development Expert Advisory Panel (RDEAP), an HMRC-chaired group whose six external members, drawn from AI, life sciences and advanced manufacturing have been chosen to enhance HMRC’s understanding of technological development across certain sectors.
While its role is limited, its creation shows how sectoral thinking is being built into the administration of a relief that was designed to be neutral.
How it was meant to work
As my “Evolution of UK R&D Tax Reliefs” series explains, when R&D Tax Credits were first introduced in 2000, they were aimed at encouraging commercial research and technological development across the economy, not to favour any particular field (although for the first few years, software-based claims in particular were subject to heavier HMRC scrutiny than engineering and manufacturing, for example).
Back then, the Treasury had little faith in the Department of Trade and Industry’s ability to run targeted schemes. It wanted a mechanism that would operate cleanly through the tax system and avoid the jumble of failed, industry-specific subsidies that had preceded it.
The relief was therefore designed to be technologically neutral to minimise political interference. Any company that could demonstrate a genuine scientific or technological advance was eligible, regardless of sector.
The definition of qualifying activity was based on the OECD’s Frascati principles and applied through self-assessment by so-called “competent professionals” within the claiming company.
What set the policy apart was its neutrality: it recognised effort and uncertainty across industry rather than ministerial judgement about which technologies might succeed.
As Jay Avraj Bhatti put it on LinkedIn, “The point of R&D relief is to encourage many to try something new, not a handful of mega-projects to get Treasury pre-clearance like nuclear plants.”
The risk of backing the wrong horse
Britain’s record on picking technological winners is poor. Gas-cooled nuclear reactors, wave-energy prototypes, commercial supersonic flight, hovercraft and a series of abandoned carbon-capture projects all began as bold national ambitions and ended in disappointment.
Each reflected the same misplaced confidence that innovation could be planned from above rather than discovered through competition.
The Treasury’s current rhetoric around “AI, clean energy and life sciences” shows that the instinct remains unchanged. Favouring such fields may sound strategic but it alters behaviour.
The signal encourages activity in favoured sectors and discourages it elsewhere.
Advisors begin to describe projects in language that fits the government’s current priorities, describing logistics algorithms as “AI”, packaging as “green innovation” or automation as “advanced manufacturing”. None of this is necessarily dishonest, but it muddies the purpose of the relief. The focus shifts from what companies actually do to how convincingly they can describe it.
The government’s 2025 Industrial Strategy now identifies eight “superstar sectors” as the engines of national growth for the next decade: advanced manufacturing, professional services, clean energy, creative industries, defence, financial services, life sciences and digital technologies.
Some have begun to question whether this approach makes sense in practice. The East Midlands Inclusive Growth Commission, for example, recently warned that while such prioritisation may make sense nationally, it could deepen regional disparities.
Around 85% of people in the East Midlands are employed outside these eight sectors, meaning a focus on them could create a geographically and demographically skewed form of growth that excludes many communities.
The same logic applies to R&D incentives. A policy that applies only to selected industries may look sensible on paper but will inevitably concentrate opportunities by region, company size and sector.
There is also a difference between supporting technological fields and favouring commercial sectors. Funding early-stage research in areas like AI or quantum is one thing. Writing off entire markets such as care, retail or hospitality as incapable of R&D is another. HMRC’s current stance risks confusing the two, dismissing genuine technological advances simply because they come from the wrong kind of business.
The spread of AI is beginning to make that bias look outdated. Some of the biggest productivity gains are now coming from sectors once dismissed as low tech, including care, retail, logistics and hospitality. R&D, increasingly, is happening everywhere.
The issue arises when those priorities begin to distort a supposedly neutral tax relief. The R&D scheme was designed to recognise technological progress wherever it happens, whether in healthcare, manufacturing, logistics or software. Its strength lies in supporting how R&D happens, not where it happens.
The R&D tax regime is already under pressure from HMRC’s drive to clamp down on error and fraud. Adding a policy bias towards certain industries would only make the uncertainty worse.
Firms in favoured sectors may expect more sympathetic treatment. Others may face tougher scrutiny, not because their work is weaker but because it doesn’t fit the story the government wants to tell about growth.
Lessons from abroad
Most countries that run R&D incentives have largely avoided turning them into industrial policy.
Canada, France and Australia all base their schemes on sector neutrality, judging eligibility on technical merit rather than ministerial priorities. In practice, no system is ever perfectly neutral, but these models have generally resisted the temptation to steer support towards government favourites.
China offers a clear example of both the potential and the risks of directed innovation, albeit on a different scale to the UK.
The Chinese government has poured vast resources into what it sees as the technologies of the future, such as semiconductors, electric vehicles, advanced materials and renewable energy. That approach has built scale quickly and secured China a strong position in several global industries.
But it has also created imbalances: production that exceeds demand, financial strain and visible waste. Central direction can deliver speed, even technological leadership, but rarely efficiency.
It also remains to be seen how many of those bets will pay off over time.
Recent analysis supports that view. Writing in The Telegraph, Ambrose Evans-Pritchard argues that China’s vast, state-directed industrial strategy has produced “technological islands of excellence” alongside widespread overcapacity, falling productivity and financial strain.
These outcomes closely reflect the risks inherent in top-down innovation policy.
Keep it simple
The task for policymakers is not to decide which industries deserve support, but to ensure that R&D can take place wherever opportunity exists.
Trying to spread activity for political balance would misdirect resources and blur the scheme’s purpose. The government’s job is to create the conditions for R&D to happen, not to decide where it should.
Notwithstanding the fraud and error that have plagued it, the R&D scheme’s strength lies in its simplicity. It supports what the market is willing to take a risk on, not what’s politically preferred.
If it becomes a tool of industrial strategy, that neutrality will be lost. Innovators don’t need the Treasury to decide which ideas matter, they need clear rules, consistent enforcement and the freedom to pursue the unexpected.
The government’s £55 billion commitment to frontier technologies may prove valuable, but if that strategic focus seeps into the wider R&D regime, it risks discouraging curiosity in areas that get less attention.
R&D Tax Credits were created as a flexible framework to encourage experimentation wherever it happened.
That principle shouldn’t be lost.
Article written by Rufus Meakin
Rufus Meakin works with tech companies to help ensure their R&D Tax Credit claims are accurate and defendable.
If you would like to discuss any aspect of your R&D Tax Credit claim, then please feel free to book an exploratory call here: https://calendly.com/rufusmeakin-uk/r-d-tax-credits-exploratory-call
