Introduction

The MedTech and HealthTech sectors play a pivotal role in shaping the future of healthcare systems. These industries are at the forefront of innovation, driving advancements in diagnostics, treatments, and patient care. The HealthTech sector is defined within the report to include:

• General medical devices;
• Active implantable medical devices;
• In vitro diagnostic medical devices; and
• Digital health

This article explores key challenges and opportunities shaping the UK HealthTech sector for small and medium-sized enterprises (SMEs), the nuances of R&D tax relief schemes and the transformative role of artificial intelligence (AI) on the UK’s global landscape.

Funding Challenges in MedTech/HealthTech

In October 2024, the UK Office for Life Sciences published a report assessing the current state and future potential of the UK Healthtech sector. It examined the sector’s manufacturing and research capabilities, outlining strategic recommendations to address persistent challenges and drive sustainable growth. These initiatives are driven to provide policymakers and stakeholders with the insights needed to elevate the UK’s economic and technological impact in Healthtech.

Despite these attempts, access to funding remains a critical obstacle for the majority of UK-based SMES. Unlike larger corporations, which often have the financial muscle and resources to invest in cutting-edge research and development, many SMEs struggle to keep pace. This imbalance can limit the diversity and accessibility of medical innovations, as SMEs frequently lack the means to invest heavily in R&D. The high costs associated with testing and compliance further exacerbate this disparity. For example, clinical trials—necessary for bringing innovative products to market—are resource-intensive and require adherence to stringent regulatory standards.

Furthermore, selling into the NHS remains a significant hurdle. Procurement processes are often slow, fragmented, and lack transparency, with regional variations that can further delay the adoption of new technologies[1]. This environment can stifle innovation, disadvantaging SMEs that may lack the time to navigate such complexities.

R&D Tax Relief: What Costs Are Claimable?

To support innovation, the UK government offers an R&D tax relief scheme, enabling companies to claim back eligible expenses incurred during research and development activities. Understanding which costs qualify is crucial for businesses aiming to maximise these benefits.

Claimable Costs Under the R&D Tax Relief Scheme

• Staff Costs: Salaries, pensions, and National Insurance contributions for employees directly involved in R&D activities. For example, a software engineer developing diagnostic algorithms can have their wages included.
• Consumables: Materials and supplies used up in the R&D process, such as chemicals for lab testing or components for prototype devices.
• Software: Specific software tools needed for R&D purposes, such as data analysis platforms used for testing new drug formulations.
• Subcontractor Costs: Payments to third-party contractors carrying out R&D tasks, such as clinical studies or specialised testing procedures.
• Utilities: A proportion of electricity, gas, and water costs directly attributable to the R&D project.

These categories provide vital financial support for companies engaged in innovation, allowing them to reinvest in future advancements.

The Role of AI in Accelerating Innovation

Artificial intelligence has emerged as a transformative force in the MedTech and HealthTech sectors. By automating time-consuming processes, AI accelerates the pace of innovation, enabling companies to bring products to market faster and more efficiently. For example, AI-powered platforms can rapidly analyse vast datasets to identify potential drug candidates, significantly reducing the time required for initial research phases.

In addition to speeding up development cycles, AI enhances precision and personalisation in healthcare. Machine learning algorithms can predict patient outcomes, optimise treatment protocols, and improve diagnostic accuracy, contributing to better overall health outcomes. As AI technologies evolve, its integration into R&D processes is poised to redefine the competitive landscape, offering new opportunities for both SMEs and larger corporations if incorporated correctly.

Strengthening the UK HealthTech Environment

To harness the full potential of the MedTech and HealthTech sectors requires a collaborative approach. Policymakers must work closely with industry leaders, clinicians, and patients to build agile frameworks that encourage innovation while safeguarding trust and safety.

One key point to highlight is the change in how the funding gap is now being addressed. Under the previous system, the SME scheme offered significantly more generous support than RDEC, allowing loss-making SMEs to claim up to 33% of their qualifying R&D expenditure. This made the UK an especially attractive destination for R&D investment, particularly for innovative health and med tech start-ups that typically incur losses in their early stages. While the introduction of the Enhanced Research and Innovation Support (ERIS) aims to close this gap, access to the enhanced rate is now conditional: SMEs must be loss-making and meet a relatively high R&D intensity threshold. Even then, the maximum relief available is around 27%—a noticeable drop from the previous 33%.

While ERIS is a step in the right direction to maintain support for genuinely R&D-intensive businesses, there is a risk that the reduced generosity of the scheme could weaken the UK’s competitive position, particularly in sectors like health and med tech where early-stage companies are critical to driving innovation.

To better incentivise R&D in these high-priority sectors, the government could consider either:

• Reintroducing a higher rate specifically targeted at pharmaceutical, medtech, healthtech and biotech companies, where R&D intensity and loss-making status are common
• Or lowering the R&D intensity threshold for these sectors to ensure that more businesses qualify for the enhanced rate.

Without further fine-tuning, there is a danger that promising start-ups may scale their R&D activities elsewhere, reducing the UK’s pipeline of innovation in these areas

Key priorities include:

• Improving access to funding, especially for SMEs.
• Simplifying NHS procurement processes to accelerate the adoption of new technologies.
• Facilitating secure, interoperable data sharing to fuel AI and digital health solutions.

The interplay between funding, R&D tax relief, and AI-driven innovation contributes to a more robust MedTech/HealthTech ecosystem in the UK. By addressing funding disparities and supporting SMEs through initiatives like R&D tax relief, the sector enables a diverse and competitive environment. AI’s role in accelerating innovation further strengthens the UK’s global standing as a leader in medical technology and healthcare solutions.

Ultimately, these advancements not only benefit businesses but also enhance the overall patient care. Faster innovation means quicker access to life-saving treatments and a more resilient healthcare system ready to face future challenges.

Despite ongoing headwinds, the UK remains a hub for health innovation. With sustained support and strategic collaboration, the country is well-positioned to lead the next era of global healthcare transformation, not just for its citizens but for global population.

Rukayya Saifuddin, Associate R&D Consultant, RCK Partners

[1] https://insights.citeline.com/medtech-insight/conferences/ai-isnt-flying-off-the-shelves-in-the-nhs-says-healthtech-startup-ceo-RE3XMM632VBQPHMNKDFS4VU6MY/

Article provided by RCK Partners.