R&D Tax Credits for Engineering Firms Explained

In fact, while engineering is one of the UK’s most R&D-intensive industries, HMRC data shows that many businesses either under-claim or don’t claim at all, often due to misconceptions about eligibility. This guide explains what qualifies as R&D for tax purposes, the types of engineering activity that may meet HMRC’s definition, and the myths that often hold companies back.

What HMRC considers R&D for tax purposes

HMRC defines R&D as taking place when a project seeks an advance in science or technology and attempts to resolve scientific or technological uncertainty. This definition is intentionally broad, covering both new developments and meaningful improvements to existing technologies.

Engineering businesses do this every day. Whether you’re designing a more efficient production system, developing materials that withstand extreme environments, or experimenting with new processes, many of these activities may fall within HMRC’s definition of R&D.

Why engineering firms often miss out

Despite strong eligibility potential, many engineering firms assume their work is “just problem-solving” or “routine development”. In reality, engineering involves continuous iteration, testing, modelling, simulation, prototyping, and process improvement; all areas where scientific or technological uncertainty typically exists.

With engineering generating over £1 trillion in turnover and employing nearly a fifth of the UK workforce, the opportunity for the sector to benefit from R&D tax relief is significant. Yet many businesses still don’t claim because of misunderstandings about what qualifies.

Common misconceptions about R&D tax relief in engineering

1. “Our activities aren’t classed as R&D.”

Most engineering projects involve uncertainty, whether something will work, how it will perform, or how to achieve specific technical outcomes. That uncertainty is often the basis for qualifying R&D.

Examples include:

• Prototype development and iterative testing
• Improving system efficiency or structural performance
• Developing new materials or modifying existing ones
• Integrating advanced technologies into complex environments

Even if R&D isn’t your core purpose, if you’re solving problems that can’t be resolved by existing industry knowledge, parts of the work may qualify.

2. “Our R&D wasn’t successful.”

Success isn’t a requirement. HMRC recognises that innovation involves trial and error. If you attempted to resolve scientific or technological uncertainties, even if the project stalled, pivoted, or failed, qualifying activities may still be present.

3. “We didn’t make a profit, so we can’t claim.”

Loss-making companies can still claim R&D tax relief. Under the merged R&D Expenditure Credit (RDEC) scheme introduced in April 2024, both profitable and loss-making companies can generate a credit for qualifying R&D, with enhanced support for R&D-intensive SMEs.

Relief can be used to:

• Reduce Corporation Tax
• Offset future liabilities
• Or, in some cases, generate a payable credit

4. “The R&D happened overseas so it doesn’t count.”

While HMRC encourages UK-based innovation, some overseas R&D costs may still qualify depending on the circumstances. Engineering sectors often rely on specialist facilities or environments that aren’t available in the UK for example, deep-ocean testing, high-altitude trials, or specialist materials research.

The key factor is whether the company is a UK limited company subject to Corporation Tax.

5. “Our business is too small.”

Company size is not a barrier. Under the current system:

• SMEs can still benefit from enhanced support if they are R&D-intensive
• All companies, regardless of size, claim under the R&D Expenditure Credit mechanism
• SMEs may also access the RDEC route when subcontracted or grant-funded

Even very small engineering teams can produce qualifying R&D.

6. “Our claim is too small to bother with.”

Engineering projects often contain more qualifying activity than expected. Many businesses discover that costs such as staff time, software, prototypes, tooling, materials for testing, and subcontractor support all contribute to eligible expenditure.

If R&D has occurred, the claim may still be worthwhile and reviewing past periods (within the two-year amendment window) can make a meaningful difference.

Examples of R&D in engineering fields

Engineering disciplines are rich in qualifying R&D activity. Here are practical examples aligned with HMRC’s definition:

Biomedical engineering

• Developing bio-compatible materials and advanced 3D-printed implants
• Improving surgical robotics and real-time imaging technologies

Aerospace engineering

• Advancing electric propulsion for short-haul aviation
• Designing new thermal systems or composite structures for spaceflight

Materials engineering

• Creating high-performance, sustainable materials for automotive and F1
• Developing long-distance energy transmission cables for offshore wind

Civil engineering

• Designing low-carbon buildings using novel airflow or insulation systems
• Innovating retrofitting methods to improve energy efficiency

Energy engineering

• Engineering floating offshore wind platforms
• Research into sustainable nuclear fusion technologies

Chemical engineering

• Developing lighter, higher-density batteries for advanced transport
• Improving chemical processes to reduce waste or increase yield

If your firm has created or improved products, processes, services, systems or devices, especially where technical challenges had to be overcome, parts of your work may qualify.

Eligibility criteria for engineering firms

To claim R&D tax relief, your business must:

1. Be a UK limited company subject to Corporation Tax

Only companies paying (or potentially paying) Corporation Tax can claim.

2. Have carried out qualifying R&D activities

These include:

• Activities seeking an advance in science or technology
• Attempts to resolve scientific or technological uncertainty
• Certain indirect supporting activities, such as maintaining specialist equipment

3. Have incurred qualifying expenditure such as:

• Salaries, NI and pensions for relevant technical staff
• Consumables and prototype materials
• Software licences used for R&D
• Subcontracted or externally provided workers (subject to scheme rules)

Engineering firms rarely claim everything they’re entitled to

Many engineering businesses underestimate the breadth of eligible work across feasibility, testing, modelling, prototyping, iteration, quality improvement and system optimisation.

A clear, well-structured assessment helps identify qualifying activities and ensures claims are compliant with HMRC’s expectations, especially in light of stronger record-keeping requirements under Guidance for Compliance (GfC3).

If you’d like to understand whether your engineering work qualifies, or whether past claims could be strengthened, our specialists are here to help. Book a free consultation today.