If you make a product and have spent time working out how to make it lighter, stronger or faster without losing performance, you may already qualify for tax relief. Manufacturing is the biggest user of R&D tax credits in the UK, with 27% of claims and 27% of the relief claimed in 2024 to 2025 according to HMRC's recent statistics.
This guide covers what qualifies on the factory floor, where HMRC draws the line between R&D and ordinary production, which costs you can include, and what to keep on file.
What counts as R&D in manufacturing?
HMRC applies the same test to every sector. Your project must seek an advance in science or technology by resolving scientific or technological uncertainty that a competent professional in your field couldn't easily solve. Our guide to HMRC's definition of R&D covers the wording in full. On a factory floor, it usually comes down to one thing: you didn't know whether, or how, you could achieve a result, and you had to test your way to an answer.
The advance has to be in your wider field, not just in your business. Adopting a process that's new to you but standard across your industry doesn't qualify, however much it improves your margins.
These are the kinds of manufacturing project that commonly meet the test:
- Developing a new product or component where it was uncertain you could meet the specification, such as strength, weight, tolerance or heat resistance
- Developing or improving a process where known methods wouldn't deliver the result, such as moulding a thinner wall without warping, or cutting cycle time without losing surface finish
- Working with new materials or formulations, including recycled or bio-based inputs that behave differently from the material they replace
- Adapting machinery or automation to handle a material, geometry or tolerance it wasn't designed for
- Developing control software, sensors or data models for a production line where it was uncertain the system could reach the accuracy or response time you needed
Using standard machines and tools doesn't rule you out, as our post on off-the-shelf tools explains. Also, a project doesn't have to succeed; if the uncertainty was real, the work can qualify even when the answer turned out to be "it can't be done".
Where does R&D end and regular production begin?
This is the line manufacturers most need to understand. Trial production can be R&D, but only while there's genuine uncertainty left to resolve. HMRC's guidance on production and distribution is clear that a trial with no uncertainty which is "undertaken to validate the manufacturing process would not attract R&D relief".
In practice, the work counts up to the point you've solved the problem. Once you know the process works, fine-tuning it for yield and output is production.
On that note, if R&D ends when the uncertainty is concluded, then it begins when the uncertainty is identified. Prep work or related work leading up to your testing and iteration won’t qualify.
Company A is a 25-person injection moulder developing a thin-walled housing in a glass-filled polymer for a new customer. Nobody knows whether the part will hold its dimensions as it cools, so the team runs five rounds of tool modifications and trial shots. The fourth round meets the tolerance. The costs of the first four rounds qualify; the work after that, adjusting settings to improve yield, is production.
Company B is a 12-person fabricator that receives a new drawing for a bracket in a stainless steel grade it has welded hundreds of times. It runs a first batch to check the welds pass inspection. Every step uses known methods and nobody doubted the outcome, so this is validation and it doesn't qualify.
Prototypes and one-off builds follow the same logic. A prototype that's designed and constructed for the R&D project and not for sale can be claimed, including the materials used to build it.
"First of class" items are different: if you intended from the outset to sell the item to a customer, the total build cost isn't expected to qualify. Specific activities within the build, like designing and testing a new sub-assembly, still can. It’s about separating the cost of resolving the uncertainty from the cost of building what the customer ordered.
Which manufacturing costs can you claim?
Claimable costs fall into set categories. These are the ones that come up most often for manufacturers:
- Staff costs for the engineers, designers and machinists working on the project, plus supervisors and managers where they directly contribute. Our guide to claiming staff costs covers salaries, employer's National Insurance and pension contributions.
- Consumable items, meaning the materials, fuel, power and water consumed or transformed in the R&D. Material used in trial parts that are scrapped can count; material in anything you sell as a finished product can't. See consumable items for the detail.
- Software licences, data licences and cloud computing used in the R&D, such as CAD or simulation tools.
- Subcontractors and externally provided workers, claimed at 65% of the payment for unconnected parties, provided the work is carried out in the UK. Our post on subcontractors and EPWs explains the difference.
Most of your team will split their time between R&D and production, so you'll need a fair and documented split; our guide to apportioning costs shows how.
Rent and premises costs can't be claimed. Machines, test rigs and buildings are capital expenditure and also sit outside the credit, but capital spend on R&D can qualify for R&D capital allowances instead.
What about your energy bills?
R&D tax credits cover some of your energy bills, as they’re considered part of your consumable items. You can claim a proportionate amount of your overhead costs (energy, water, gas…) if it goes into your R&D work. All of this comes down to an effective apportionment method, so you cand demonstrate how much of your energy was actually used in the R&D process.
But there’s another government incentive that can cut down your electricity bills: the British Industrial Competitiveness Scheme (BICS). This scheme, alongside other energy reliefs like the Supercharger and Climate Change Levy Relief, offers manufacturers some relief from the rising energy costs and supports British manufacturing to be internationally competitive.
For more information about BICS or other energy relief incentives, check out Energy Relief Vault, a quick, simple, online portal dedicated to cutting your energy bills.
How much is the relief worth to a manufacturer?
Under the merged scheme, you receive a taxable credit of 20% of your qualifying costs. After corporation tax on the credit, the net benefit is 15% at the 25% main rate and 16.2% at the 19% small profits rate.
Company C, a 30-person manufacturer, spends £150,000 on qualifying costs developing a new product. Its credit is £30,000 (20% of £150,000). Paying corporation tax at the 25% main rate, the net value of that credit is £22,500.
The credit is set against your corporation tax first, and any balance can be paid to you, subject to the PAYE and NIC cap. Our post on how HMRC pays out the credit explains the order.
If you're a loss-making SME and at least 30% of your total expenditure goes on qualifying R&D, you may be able to claim under ERIS instead. It works differently to the usual credit, giving you an extra 86% deduction on top of the usual 100% and a payable credit of up to 14.5% of the surrenderable loss, which can be worth up to 26.97% of your qualifying spend. Established manufacturers with large production costs usually fall below the 30% threshold, but smaller businesses focused on developing a new product may clear it.
What evidence should you keep?
HMRC wants to see that you faced a genuine technical problem and worked through it. A compliance check will usually come back to one question: was the outcome genuinely uncertain at the start? Manufacturers already produce much of the evidence that answers it:
- Design iterations and CAD revision history
- Trial batch records, test results, and scrap or failure logs
- Inspection and tolerance data before and after each change
- Notes or emails explaining why an approach was changed or abandoned
- Timesheets or other records showing who worked on the project and for how long
Pair these with a technical report that sets out the baseline (what was possible in your field when you started), the uncertainty, and how you tackled it.
If this is your first claim, or you haven't claimed in the last three years, you'll also need to submit a claim notification form within six months of the end of the accounting period.
Key takeaways
- Production isn't R&D, but developing the process can be. Trial production qualifies while uncertainty remains; validating a process you already know works doesn't.
- The advance has to be in your field, not just your factory. A new process that's standard elsewhere in your industry doesn't count.
- Prototypes built for the project qualify. Items built for a customer from the outset need the R&D element separated out.
- Match each cost to its category. Staff, consumables not sold in finished goods, software and cloud, and UK-based subcontractors can be claimed; machinery and premises can't, although capital allowances may apply.
- Records made during the work serve you best. Notes taken while the project is running take far less effort than rebuilding the story a year later.
If you're not sure whether a project on your shop floor qualifies, get in touch and we'll walk you through it. Our team reviews every Tax Cloud claim before it goes to HMRC, so you can file knowing the technical case and the costs line up.
