Sectors •9 min read

R&D tax relief for manufacturing companies

MJ

Matthew Jones ACA CTA

Last reviewed August 2026 · Editorial standards

Manufacturers claim R&D tax relief for two kinds of work: developing new or improved products, and developing the processes that make them. Both qualify where the work had to resolve genuine technical uncertainty rather than apply methods the industry already understands. Under the merged scheme, £100,000 of qualifying spend is worth £15,000 net at the 25% corporation tax rate.

What manufacturing work qualifies as R&D?

On the product side: development where the required performance cannot be reached with existing materials, designs or formulations, including redesign forced by regulation or by a component becoming unavailable. On the process side, qualifying work is common and regularly missed. At concept level:

  • Increasing line speed without losing quality, where the trade-off is not solved by known methods or supplier settings.
  • Integrating automation into an existing line where the interaction between new and legacy equipment is uncertain, a pattern we examine in robotics prototyping and technological uncertainty.
  • Developing tooling, fixtures or process parameters for a material or geometry the industry has not handled before.
  • Scaling up from pilot batches to production volumes where behaviour changes with scale: yield, tolerance and repeatability that held on the bench failing to hold on the line.

Automation projects meet a standard objection — every component came from a catalogue — and the Guidelines answer it. System uncertainty results from the complexity of a system rather than from uncertainty about how its individual components behave (paragraph 29), and combining standard technologies, devices and processes can involve scientific or technological uncertainty even where the principles for their integration are well known — there will be uncertainty if a competent professional working in the field cannot readily deduce how the separate components or sub-systems should be combined to have the intended function (paragraph 30). The limit is stated alongside it: assembling components to an established pattern, or following routine methods for doing so, involves little or no uncertainty (paragraph 29). We take that line further on what a scientific or technological uncertainty is.

Trial runs that get scrapped, and development that fails, still qualify. The relief follows the attempt to resolve the uncertainty, not the outcome.

Much of this overlaps general engineering R&D and off-site construction, which we cover on their own pages.

When does process development count as an advance?

A process qualifies on the same test as a product. The Guidelines treat a project seeking an appreciable improvement to an existing process through scientific or technological changes as R&D (paragraph 9(c)), and an advance may have tangible consequences, such as a process which generates less waste, or intangible ones, including cost improvements (paragraph 7). A process producing the same output materially more efficiently can therefore be an advance, provided the improvement comes from scientific or technological change and is appreciable: more than a minor or routine upgrading, and something a competent professional in the field would acknowledge as genuine and non-trivial (paragraph 23). Work that only brings a company into line with what the field already knows is not an appreciable improvement, however new it is to your site (paragraph 24).

Scale-up often carries both an advance and an uncertainty. The Guidelines are direct: uncertainty will often arise from turning something already established as scientifically feasible into a cost-effective, reliable and reproducible process (paragraph 13). Yield that collapses at volume, tolerances that drift across a line, a formulation that behaves differently in a 2,000-litre vessel than a 20-litre one — each asks whether and how the thing can be made, which having made it once does not settle. The full definition sits in what counts as qualifying R&D.

How do prototypes and pilot plants fit?

The design, construction and testing of prototypes generally fall within the scope of R&D; once modifications reflecting the test findings have been made and further testing satisfactorily completed, the uncertainty has been resolved and further work is not R&D (paragraph 39). A pilot plant’s construction and operation is R&D while its operations are being assessed, until the uncertainty associated with the intended advance is resolved (paragraph 40). More generally, R&D ends when the knowledge is codified in a form a competent professional can use, or when a prototype or pilot plant with all the functional characteristics of the final process or product is produced (paragraph 34), though uncertainty emerging after that point can require new R&D, which the Guidelines separate from routine fault fixing (paragraph 35).

What does not qualify?

Buying and installing new machinery, however advanced, is capital investment rather than R&D, and capital expenditure does not qualify for R&D tax relief. Capital spending on the R&D itself — the rig, the test cell, the pilot line — can attract research and development allowances. Ordinary production plant gets neither: it goes through the normal capital allowances instead. Routine quality control, cosmetic changes and efficiency gains achieved by applying known methods do not qualify either.

The line that decides most manufacturing claims runs between qualifying process development and routine commissioning. Paragraph 14 is explicit: improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty. Commissioning a line to the supplier’s specification, dialling parameters in within a known operating window, tuning a process back into a tolerance it has held before: skilled and necessary, but not R&D. HMRC’s compliance guidance applies the same logic to scale-up: in its worked example, preparing for factory production does not qualify because the competent professionals identify no technological uncertainties in it, and the days spent fine-tuning and testing to meet manufacturing standards do not qualify either. That is a finding about one project, not a rule that scale-up never qualifies.

The test throughout is whether a competent professional could readily have resolved the problem with existing knowledge.

What does a manufacturing claim look like in practice?

Midtec Products, a manufacturing company in Ammanford, South Wales, developed an emissions reduction device that could be retrofitted to existing wood-burning stoves after DEFRA released new eco criteria for cleaner fuel burning. The qualifying costs covered staff, agency staff and materials, and the claim was worth £40,000.

“We had excellent advice and support from LimestoneGrey in handling the submission of the claim and guiding us through the process.”

Trefor Jenkins, Director at Midtec Products

The full Midtec Products case study sets out the project. It also illustrates a wider point: a change in industry legislation, whether it opens an opportunity or forces a redesign, is one of the most reliable triggers for qualifying work in manufacturing.

Which costs go into a manufacturing claim?

Staff costs apportioned to development time, including production engineers and operators running trials, not just the design office. Materials consumed in prototypes and trial runs. Agency staff, as externally provided workers, at 65% of payments to unconnected providers where the workers are subject to UK PAYE. Subcontracted development at 65% for unconnected parties. Connected parties are restricted instead to the lower of the payment and the other party’s own relevant expenditure. Subcontracting also raises the question of who claims: a manufacturer developing to a customer’s specification should check which side of the line the contract puts it on, and our guide to contracted-out R&D works through the test. Software used in the R&D also counts. Capital equipment, rent and patent costs do not, though capital equipment bought for R&D may attract R&D allowances instead.

Consumables carry more weight here than in most sectors. Materials used, consumed or transformed in the R&D qualify: raw materials, prototype components and test batches, including the scrapped trial runs that make up much of a manufacturing claim. Light, heat, water and power consumed by the R&D qualify too, apportioned on a basis a reader can follow: run hours or batch counts rather than a round percentage of the site bill. One rule catches manufacturers more than most: where materials are absorbed into something you then sell in the ordinary course of business — a prototype that ships as a product, or trial output that reaches customers — the cost of those materials has been outside the consumables claim since 1 April 2015, with apportionment where only part of a batch is sold. Materials used up in testing, in iterations you keep, and in output scrapped or sold only as waste are unaffected: a transfer of waste is not a transfer in the ordinary course of business, whether or not you are paid for it. The category rules sit in which costs qualify for R&D tax relief.

What is the claim worth?

Most manufacturers claim under the merged scheme: a 20% expenditure credit, so £100,000 of qualifying spend gives a £20,000 gross credit, netting to £15,000 at the 25% corporation tax rate or £16,200 where the 19% rate applies. Loss-making companies receive £16,200 net in cash on the same spend, subject to the PAYE cap.

A loss-making SME whose relevant R&D expenditure is at least 30% of its total relevant expenditure can claim up to £26,970 per £100,000 of qualifying spend through ERIS. That denominator is broadly the trading costs in its accounts for the period, not just the R&D ones, which is why 30% is a high bar for most manufacturers. Connected companies are counted on both sides of the ratio. Grant funding no longer reduces relief under the current schemes; the position is set out in grant funding and R&D tax relief. The claim value calculator gives an estimate on your own numbers, and the ERIS intensity calculator works the 30% test.

What evidence does a manufacturing claim need?

Evidence is rarely a problem in manufacturing if it is captured while the work runs. The shop floor already produces the right material: trial run and batch logs, scrap and rework records, control charts showing a process moving in and out of capability, non-conformance reports, and the machine settings tried and abandoned. A control chart that will not settle describes an unresolved process uncertainty better than any narrative written a year later.

Three things turn that material into a claim. Tie the records to a project boundary, since a trial log evidences R&D only inside a project with a stated advance and uncertainty. Give the apportionment a basis where operators and engineers split time between trials and production: HMRC’s compliance guidance accepts an estimated proportion of known expenditure where the estimate is arrived at using evidence and reason, with the methodology and apportionment basis recorded, and trial run hours usually supply it. Write the Additional Information Form, mandatory for every claim since 8 August 2023, from those records rather than from memory. Our page on what records an R&D claim needs covers the general position.

Get a straight answer

LimestoneGrey is a firm of chartered tax advisers and chartered accountants specialising in R&D tax relief regulated by ICAEW. We prepare manufacturing claims that are meant to be checked: costed carefully, evidenced from production records, with enquiry support included as standard and the fee agreed before work starts. Two compliance points to hold onto: first-time claimants must notify HMRC within six months of the end of the period of account or the claim is invalid, and HMRC checked around one in six claims in 2023-24, its latest published figure, so process development should be documented while the trials run. Our guide to HMRC R&D enquiries sets out what a check involves.

If you want a straight answer on whether your development work qualifies, get in touch.

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