Sleepwalking through R&D tax relief changes could cost manufacturers
Few sectors are as R&D-intensive as manufacturing. The industry accounts for almost half (48%*) of all UK business R&D spend, up from 41% in 2023. Chemicals and pharmaceuticals alone contribute around 40% of that total, but investment stretches across the sector, from advanced food production to space exploration.
Whether it’s improving production processes, developing new technologies or testing advanced materials, R&D is a key driver of competitiveness and long-term growth for both business and the economy.
That makes R&D tax relief, a government incentive designed to encourage businesses to invest in and commercialise innovation, all the more important. It allows companies to reclaim a portion of qualifying research and development costs, either by saving on their corporation tax bill or as a cash credit. For many, this relief provides critical cash flow that funds the next cycle of innovation.
Yet, boardrooms frequently rely on outdated assumptions and incomplete knowledge. Relief is no longer just about what activities qualify, but about who has the right to claim, how contracts are written and whether notification requirements are met on time.
The merged R&D scheme: What manufacturers need to know
Several aspects of R&D tax relief have stayed the same. The criteria for what R&D activities can be claimed against haven’t changed. Qualifying projects still include those aimed at advancing knowledge, testing new processes or improving products.
Businesses innovating independently through spotting market gaps or developing new products in-house remain eligible, and loss-making SMEs that spend at least 30% of total expenditure on R&D can continue to access higher relief rates through ERIS (enhanced R&D-intensive support).
The major reform is the merger of the SME scheme and R&D expenditure credit (RDEC) into a single, unified credit system. By simplifying the tax relief landscape, ensuring consistency and focusing support on genuine innovation, the merger aims to address historically poor standards of claims and compliance.
The most significant change is how contracted-out R&D is treated. Under the new rules, the initiator of the R&D (the business that decides a project is necessary) is generally entitled to claim, even if the work is carried out entirely by a subcontractor.
For example, if an automotive OEM commissions a supplier to design a lighter seat, it is likely that the claim will sit with the OEM because they initiated the project, not the seating specialist who completes the work. For SMEs that previously claimed relief on subcontracted projects, this could reduce eligible claims. For large manufacturers like OEMs or Primes, it opens new opportunities to capture relief on work they previously could not.
Determining exactly who should claim for a project is complex and will require careful examination of a number of factors, with legislation requiring potential claimants to “have regard to the terms of the contract and any surrounding circumstances”. Surrounding circumstances include factors such as IP ownership, financial risk, autonomy, R&D exploitation, decision-making processes, and even the experience and seniority of those decision makers.
One of the least discussed but most serious changes involves notification. Businesses claiming for the first time (or for the first time in more than three years) must now pre-notify HMRC by submitting a claim notification form. This has to be done within six months of the end of the accounting period.
Missing this deadline can invalidate the claim, meaning lost relief with no recourse. Many manufacturers are unaware of this requirement, assuming exemption when none exists.
What manufacturers should be doing now for R&D tax relief
The merged scheme applies to accounting periods on or after 1 April 2024. For many manufacturers, the impact won’t be felt until 2026 when claims for the first affected periods are filed. That delay creates a false sense of security. By the time companies are thinking about the new rules, the opportunity to shape outcomes will have passed.
Now is the time to:
- Review live and upcoming contracts to establish who has claim rights. If entitlement isn’t clearly stated, negotiate clarity as a priority.
- Consider overseas contracts, as subcontracted expenses that take place overseas will no longer qualify, except for where it would be wholly unreasonable to do so.
- Map potential early R&D projects so that claims can be linked to the right documentation and cost records.
- Stress-test existing arrangements against HMRC guidance, which now places greater weight on the terms of the contract itself.
- Plan notification, ensuring no first-time or returning claim is missed because of overlooked deadlines. And don’t assume past exemptions set a precedent.
Contractual clarity is especially critical. Agreements with suppliers or customers should define who is entitled to claim. Without this, relief may be lost, disputed or handed to another party. Being proactive puts businesses in control, whether that means securing entitlement for themselves or reflecting the value of relief in contract negotiations.
The biggest mistake I see manufacturers make is waiting until year-end to think about R&D relief. By then, opportunities to influence contract wording or gather evidence may already have passed.
Early action avoids nasty surprises, like discovering a project isn’t eligible when you’ve already costed in relief, and it can strengthen your competitive position by allowing you to price work more strategically.
Transforming the taxing into the rewarding
Unravelling the complexities of R&D tax relief can feel daunting, given HMRC’s stricter compliance requirements and the level of documentation now demanded. At Moore Kingston Smith, we specialise in helping manufacturers navigate this complex landscape.
We offer tailored, practical advice rooted in a deep understanding of your company’s unique operations, coupled with decades of experience working inside manufacturing. We’ve helped innovative companies secure hundreds of millions of pounds in R&D relief and credits.
As no two organisations are the same, we tailor our service to match your needs, with expertise spanning:
- comprehensive R&D claim preparation;
- in-depth R&D reviews;
- feasibility assessments;
- HMRC enquiry resolution;
- innovation grants.
Just as importantly, we help clients see how R&D, productivity and growth are tightly interconnected. Our multi-disciplinary expertise enables companies to make better-informed decisions across financial planning, business strategy, cyber security, digital transformation and sustainability.
The choices you make around R&D today could determine whether your business maximises relief, strengthens cash flow and positions itself to win more contracts, or misses out. Now’s the time to have the conversation. Contact our manufacturing team to see how we can help you capture every opportunity.
