Op/Ed: Rethinking R&D Tax Relief–Why Smarter Incentives Are Key to Unlocking UK Pharma Innovation

Ana Ali, R&D Tax Consultant, RCK Partners

The views and opinions expressed herein are those of the author and do not necessarily reflect the views or positions of Pharmaceutical Technology^®.

Behind every pharmaceutical breakthrough is a company that made a strategic investment into high-risk R&D, without guaranteed success. For the United Kingdom’s small- and medium-sized pharmaceutical firms, taking that step has become increasingly difficult. While the UK government has signalled strong support for life sciences through its Life Sciences Sector Plan and a £520 million (~US$688 million) recommitment to the Life Sciences Innovative Manufacturing Fund, financial tools must be equally fit for purpose if the UK wants to sustain its role as a global innovator.

A strong and vibrant small and medium enterprises (SME) ecosystem is essential to drive the innovation that fuels the pharmaceutical sector. Yet, the UK now trails behind such countries as Germany and Sweden in both gross domestic expenditure on R&D and business enterprise expenditure on R&D as a share of gross domestic product (1). Without adequate support for SMEs, this gap may widen—diminishing the UK’s appeal as a destination for R&D investment.

So, what changes must be implemented to drive the UK pharmaceutical industry to reach its full potential?

Understanding the complexities of R&D tax relief

At the heart of this discussion is the UK’s R&D tax relief framework. For years, the system has enabled innovation, especially among SMEs with tight margins and ambitious R&D plans. Between 2022 and 2023, the scientific and technical sector made up 17% of all R&D tax relief claims (2). This relief has provided countless eligible businesses with valuable assistance, enabling them to accelerate growth and ultimately further their R&D efforts.

Crucially, R&D tax relief is not exclusively awarded on successful projects. This makes it particularly well suited to the pharmaceutical sector, where high failure rates are part of the innovation process. By ensuring that firms can still receive relief for unsuccessful trials and experiments, the system acknowledges the realities of drug discovery and development.

However, while there are considerable benefits for innovative firms who are claiming R&D tax relief, understanding the specific nuances of the eligibility criteria and navigating the tax regimes is critical.

For companies with accounting periods beginning on or after April 1, 2024, the Merged Scheme R&D Expenditure Credit and Enhanced R&D Intensive Support offer a streamlined process but also introduce a new layer of complexity, which may make it more difficult for companies unfamiliar with R&D tax relief to engage with the benefits.

Navigating these criteria, understanding qualifying expenditures, and calculating the new credit rates now demand a level of tax literacy that many smaller firms simply don’t have in-house.

A shared responsibility

However, the onus to adapt practices also falls on His Majesty's Revenue and Customs (HMRC). To combat bad actors, HMRC has substantially increased their compliance activity, clamping down on fraudulent and erroneous activity within the R&D tax relief scheme. As a result, HMRC’s mass compliance approach has inadvertently deterred genuine claimants with eligible projects who are put off by the potential for time-consuming checks.

Furthermore, to truly future-proof innovation within the sector, we need to delve deeper. Research presented at a 2024 event hosted by London Business School and sponsored and by RCK Partners suggests that to maintain the UK’s competitive edge in innovation, the government could revisit the tax relief system and introduce targeted incentives for R&D-intensive SMEs (1). What’s clear is that governmental interventions to streamline guidance and improve access to information could be key to empowering more businesses to take advantage of these incentives and to accelerating innovative projects.

Financial incentives don’t just bridge funding gaps—they influence strategic decisions. When SMEs know that support is available and accessible, they are more likely to take bold steps, explore novel approaches, and invest in long-term R&D. Without that assurance, innovation stalls, talent leaves, and the entire ecosystem suffers.

The UK has a golden opportunity to revitalize its pharmaceutical sector. But to seize it, we need incentives that reflect the realities of early-stage pharmaceutical research and development: high failure rates, long timelines, and particular recognition of the role of small firms in driving big breakthroughs.

R&D tax relief should be a beacon for innovation, not a maze. By improving access, tailoring incentives, and fostering trust between business and government, the UK can turn policy into progress and keep its life sciences sector at the forefront of global innovation.

References

1. Veselinov, M; Wiley, K. Comparative Review of the UK's R&D Tax Relief Scheme Relative to Other OECD Countries. London Business School, 2024. Accessed September 12, 2025.

2. HM Revenue & Customs. Research and Development Tax Credits Statistics: September 2024 - GOV.UK. Accessed September 12, 2025.