When you hear the words ‘R&D tax relief’, it might conjure mental pictures of lab coats, software developers or tech startups. If your business doesn’t fit that image, it’s easy to assume the relief isn’t for you and move on.
However, that assumption costs UK SMEs money every year, because HMRC’s definition of research and development is far wider than you might expect. A manufacturer tweaking a production process, a food business reformulating a recipe or a trades company solving an installation problem no one’s cracked before could all have a valid claim. Yet, many of them never get around to checking.
This article breaks down what qualifies for R&D tax relief, what doesn’t and how to work out where your business stands before you apply for it.
What is R&D tax relief?
R&D tax relief (or the Research and Development Tax Credits Scheme, to give it its proper name) is a Government initiative designed to encourage greater R&D spending which, in turn, leads to greater investment in innovation. It provides tax relief based on what you spend developing new or improved products, processes or systems.
HMRC introduced the scheme for SMEs in 2000 to reward businesses that take on technical risk, with the relief applying to spending on projects that meet its definition of research and development. A separate scheme, for larger businesses, was introduced in 2002, although the two schemes merged in 2024, while a new scheme, covering enhanced R&D intensive support, was also introduced.
You can claim R&D tax relief in two ways. You can reduce your Corporation Tax liability based on your enhanced R&D expenditure. Or, if you’re a loss-making business, you can claim a cash credit paid directly to your business. Either way, the relief exists to offset some of the cost and risk your business carries, which matters when you’re funding development work before any revenue comes in. However, your business can claim R&D tax credits only if it’s liable for Corporation Tax.
What counts as R&D, according to HMRC
HMRC’s definition of R&D boils down to two tests.
First, your project must seek to achieve an advance in science or technology. Second, it must involve overcoming scientific or technological uncertainty along the way.
An ‘advance’ doesn’t mean a world first. It means making progress beyond what’s already publicly known or readily deducible by a competent professional in your field. So, improving a product or process counts, even if a competitor already does something similar, provided the information and methods aren’t freely available to you.
‘Uncertainty’, meanwhile, relates to the gap between ‘we don’t know if this will work’ and ‘we know it’ll work, we just need to build it’. So, if your team had to test, adapt or problem-solve to get a working result, that’s the signal HMRC looks for.
For example, a manufacturer developing a new way to strengthen a component without adding weight is doing R&D. So is a software company building a bespoke integration between two systems that weren’t designed to talk to each other, or a food producer changing a formulation to remove an allergen while keeping the same taste and shelf life. A construction firm working out how to fit modern insulation into a listed building without damaging its original features is also doing R&D.
None of these businesses would describe themselves as ‘traditional R&D companies’, and that’s the point of the scheme. It incentivises everyday businesses to invest in solving their technical problems, wherever that work happens to sit in the business.
Some of the things you might overlook
Your failed projects can still qualify for R&D tax relief. If your team spent months trying to solve a technical problem and the project was eventually shelved, the work that went into it is still eligible. HMRC assesses the attempt to resolve uncertainty. The commercial outcome doesn’t factor in. Plenty of businesses assume that because their project didn’t succeed, there’s nothing to claim, and leave money on the table as a result.
Work done for a client can also count. If you’re a contractor or subcontractor solving a technical problem on someone else’s behalf, that work might still be eligible, depending on how the contract was structured and who bore the risk. Don’t dismiss it outright without checking, particularly if you’re an engineering, construction or technical services firm.
Incremental improvements count, too. You don’t need to invent something new from scratch. Refining an existing product, process or system to overcome a genuine technical hurdle is enough, even if the change looks small from the outside. A manufacturer that spends six months adjusting a machine setup to reduce material waste by a meaningful margin, without a known method to reference, has likely done qualifying work.
Prototyping and testing phases count as well, even if the final product never makes it to market. The entire development process, including any failed attempts, sits squarely within HMRC’s definition, and you’re entitled to claim for every stage of it.
However, it’s worth keeping a record as you go. Design notes, test results and even emails discussing a technical setback can provide the kind of evidence that could support your claim.
What doesn’t qualify?
R&D tax relief has boundaries.
Routine testing and quality control on an established product won’t qualify, because there’s no technical uncertainty involved. Aesthetic or cosmetic changes, like a new product finish with no functional difference, fall outside the scheme, too.
Applying existing, well-documented knowledge or methods doesn’t count either, even if it’s new to your business. If a competent professional in your field could look at the problem and know the answer without needing to test anything, HMRC won’t see it as R&D work. The same goes for commercial or market research.
And software built for internal admin purposes, with no technical challenge beyond configuration, also sits outside the scheme. So, too, does replicating a competitor’s product once the method is public knowledge.
Costs you can claim for
Once you’ve established that your project qualifies, the next question is what costs you can include. Staff costs make up the biggest category for most SMEs. You can claim for salaries, employer’s NIC and pension contributions for anyone directly involved in the R&D work, apportioned to reflect the time they spent on it. Payments to subcontractors and external workers who contributed to the project count, too, although the rules around who can claim these costs have tightened in recent years.
Consumable items used in the process are also eligible, covering materials, prototypes that get destroyed during testing and a proportion of relevant utility costs like power and water where they’re directly tied to the R&D work. Software licences used directly for the qualifying activity count as well, whether that’s design software, testing tools or development platforms. Data and cloud computing costs tied directly to R&D have also become claimable in recent years.
As we mentioned earlier, the scheme changed in 2024. Most companies can now claim through the single, merged R&D scheme, with a separate, more generous rate available for R&D-intensive loss-making SMEs. The rates and rules shift periodically, so check your position against the current guidance every accounting period. What applied a few years ago may no longer reflect where things stand today.
If you’ve never looked into this, or if someone told you years ago that your business wasn’t eligible, it’s worth a fresh look. The rules, your business and HMRC’s approach have all likely moved on since then.
How can Sysum Howard Duggan Accountants help?
We work with SME owners across manufacturing, engineering, hospitality, technology and trades, and we’ve seen how often eligible projects get missed because they don’t look like R&D work on paper. Our approach starts with understanding what your team did, the technical problems you faced and how you went about solving them, before we get anywhere near the tax treatment.
We’ll tell you plainly if we don’t think a project qualifies, and we’ll help you build a robust, well-evidenced claim if it does, ready to withstand HMRC scrutiny.
Our team keeps pace with the scheme’s changes, and because we work across so many sectors, we’ve likely seen projects like yours before. We can also look at your wider tax and finance position at the same time, to help you achieve the best possible outcome for your business.
If you’re not sure whether your R&D work qualifies, get in touch with us for a review of your recent projects. All it costs you is a conversation, but it could be worth a meaningful reduction in your tax bill.