R&D Tax Credits for UK Engineering Companies

Engineering and the Merged R&D Scheme

Engineering sits at the heart of the UK R&D tax regime. HMRC's BIS Guidelines require a scientific or technological advance and a resolvable uncertainty, and that is a routine description of competent engineering work at the edge of what is known. Our dedicated engineering blog post expands the legal test; this page is the practical, sector-specific claim builder.

Under the merged scheme in force from 1 April 2024, engineering firms claim a 20% above-the-line credit regardless of company size. A profitable engineering firm at the 25% corporation tax rate sees a net benefit of approximately 15p per £1 of qualifying spend. Loss-making firms that cross the 30% R&D intensity threshold access ERIS at a 27% credit rate. The change from the pre-2024 regime is covered in our merged scheme guide.

Engineering firms are among the most consistent claimants in HMRC statistics, but the sector is not homogeneous. The claim profile of an automotive component designer, an aerospace systems house, a building services consultancy and a medical device developer all differ. This page walks through the shared rules and the sector-specific nuances.

What R&D Looks Like in Engineering

Qualifying engineering R&D typically includes:

• Mechanical design for non-standard loads, geometries or operating environments where established reference design would not deliver the performance target.
• Structural analysis and simulation using FEA, CFD or multiphysics tools to resolve a design uncertainty that required iteration and validation.
• Electrical and electronic design: power electronics, motor drives, battery management systems, RF and antenna design where novel topology or integration was required.
• Control systems engineering: novel control loops, state observers, adaptive or model-predictive controllers, functional safety (SIL) architectures beyond standard IEC 61511 patterns.
• Materials engineering: alloy selection, heat treatment, composite lay-up, adhesive bonding, surface treatment where the material-process-performance relationship had to be established experimentally.
• Prototype design, build and test programmes including test rig design, instrumentation, data acquisition and test execution.
• Fluid power, thermal management and HVAC engineering for demanding duty cycles, contamination-sensitive environments or fluctuating boundary conditions.
• Rotating machinery, drives and gearboxes: novel NVH targets, efficiency targets, or reliability targets that required bespoke design and validation.
• Systems engineering integration where the combined behaviour of sub-systems introduced emergent uncertainty not resolvable from the individual sub-system specifications.
• Reliability, environmental and durability testing that informed design iteration, including accelerated life tests, HALT, EMC and vibration qualification.

The test is the same in every case: was a scientific or technological advance sought, and was there uncertainty that a competent engineer could not readily resolve from published information? HMRC's CIRD81900 is the primary reference.

What Does Not Qualify

Careful exclusion is essential. HMRC's compliance work in engineering has focused on claims that included:

• Routine application of published design codes and standards (Eurocodes, ASME BPVC, ISO standards).
• Standard detail design from a fixed concept where no uncertainty remained.
• Drafting, CAD work and drawing production without underlying analytical work.
• Project management, programme and resource co-ordination.
• Bid writing, technical sales, customer liaison.
• Cost engineering, value engineering and commercial optimisation where the saving does not come from a technical advance.
• Routine testing against an existing specification (for example, end-of-line functional test of a commercial product).
• Certification cost where the certification process itself was routine even if the product was novel. The novel design work is claimable, the certification submission is not.
• Installation, commissioning, and maintenance of already-proven equipment.
• Training, documentation and knowledge management.

A claim that is tight on scope and strong on evidence outperforms a broader claim that invites enquiry. A specialist will draw the line at the right place.

Qualifying Costs in Engineering

Under the merged scheme, engineering claim pools typically draw from:

Staffing. Gross salary, employer NI and employer pension for UK engineers, analysts, test technicians, draughtsmen and line managers supporting qualifying R&D, apportioned by the percentage of time spent on qualifying projects.

Externally provided workers (EPWs) and subcontractors. UK-only under the merged scheme. Payments to unconnected UK subcontractors attract the 65% haircut. Typical examples: contract stress analysts, specialist consultancies, test-house work, metrology laboratories. Overseas subcontractor cost is generally excluded, with a narrow statutory exception.

Consumables. Materials consumed in qualifying test programmes (test specimens, sacrificial parts, failed first-articles, coolants, gases, calibration fluids). Commercial production materials are not consumables for R&D.

Software. CAD, FEA, CFD, CAE, PLM and simulation software licences used in qualifying R&D.

Cloud and data. HPC simulation on AWS, Azure or on-premise clusters, and licensed engineering data (materials databases, component libraries) used directly in R&D qualify from April 2023.

Utilities. Power, fuel and compressed air consumed in R&D testing, apportioned.

Our qualifying expenditure guide covers each category.

HMRC Enquiry Risks in Engineering

1. Generic uncertainty statements. "The project was technically challenging" is not an uncertainty statement. HMRC expects the specific technical question that had to be answered, what was tried, and what was resolved.
2. Time apportionment for senior engineers. Claims with a chief engineer at 100% R&D are routinely challenged. Most senior engineers split time across R&D, delivery, and commercial activity. Evidence-based apportionment is essential.
3. Contracted-out R&D. The merged scheme changed the rules. Where a consultancy is paid to resolve an uncertainty for a client, the contract terms determine which party claims. Disputes here are the biggest source of enquiry activity in engineering.
4. Consumables classification. Including saleable production parts as consumables is a common error.
5. Capital vs revenue. Test rigs, jigs and specialist tooling are often capital. Misclassifying them as R&D consumables is a focus of enquiry.
6. Overseas subcontracted analysis. Offshore FEA or CFD subcontracting is generally excluded under the merged scheme unless the narrow UK-infeasibility exception applies.
7. Grant and subsidy treatment. Innovate UK, ATI, APC and Horizon Europe interaction requires careful handling. See our grant guide.

Indicative Claim Ranges by Engineering Type

Indicative Example: A Medical Device Engineering Firm

A UK medical device developer with 28 staff has total expenditure of £3.2m for the year to 31 March 2026. The company is loss-making, finishing a Class IIb development programme ahead of CE mark submission. Two concurrent projects run during the year: a novel drug-delivery pump with a proprietary variable-orifice valve, and a wearable biosensor requiring bespoke analogue front-end and low-power wireless design.

Qualifying review: £1.35m of qualifying expenditure, comprising £920k of UK engineering, biomedical and test-technician salary time; £220k of UK subcontractor design, analysis and pilot-mould work at the 65% effective rate (contributing £143k to the pool); £75k of cloud and HPC spend on simulation runs and design-space exploration; and £90k of consumables (test rigs' sacrificial parts, biocompatibility test specimens, bench prototypes consumed in verification).

R&D intensity: £1.35m / £3.2m = 42%. The company is loss-making and above the 30% threshold, so ERIS applies. Credit: £1.35m x 27% = £364,500, of which a substantial portion may be received as a cash payment from HMRC (subject to the PAYE cap and statutory adjustments).

Next Steps

A specialist 15-minute call will tell you, by project, whether your engineering work is claimable, whether ERIS applies, and roughly what the claim is worth. Your accountant stays in the loop. For adjacent claim areas, see our manufacturing page and cleantech page.