New vs Improved Products: R&D Tax Relief Rules

R&D tax relief helps UK businesses lower innovation costs by offsetting Corporation Tax or offering credits. Whether you're creating a new product or improving an existing one, the key is addressing scientific or technical uncertainties that go beyond routine work. Here's what you need to know:

• New Products: Must push the boundaries of knowledge in the field, solving challenges that experts can’t easily resolve. Examples include developing entirely new technologies, prototypes, or materials.
• Improved Products: Must go beyond minor updates, solving real technical problems like increasing efficiency or creating sustainable solutions. Routine tweaks won’t qualify.
• Key Changes (from April 2024): A unified R&D tax scheme applies to all businesses, with relief rates of up to 27% for R&D-intensive SMEs.

Quick Tip: Document uncertainties and progress clearly, as HMRC now requires detailed narratives for claims. Misclassifying routine work could lead to rejected claims or compliance checks.

What Qualifies as a New Product for R&D Tax Relief

To qualify as a new product under R&D tax relief, it must address technological uncertainties and contribute a measurable step forward in its field. This means the product should push the boundaries of science or technology by enhancing the overall knowledge or capabilities within the industry - not just within your organisation. At the heart of this qualification is the need to resolve a scientific or technological uncertainty. This refers to challenges where even an expert in the field cannot easily determine whether something is achievable or how to accomplish it practically. These uncertainties might involve questions about whether a product is scientifically viable or how to transform a known principle into a practical, cost-effective, and reliable solution.

Eligibility Requirements for New Products

For a product to qualify, it must meet HMRC’s criteria, which focus on advancing the overall knowledge or capability of the field. This is an important distinction: the advancement must benefit the wider industry, not just your team’s understanding. If the knowledge you’re gaining is already widely known or accessible within the field, it won’t meet the criteria.

"Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field." – DSIT Guidelines

Interestingly, a project does not need to succeed to qualify for relief. The key factor is the intention to achieve progress by resolving genuine uncertainties. If a solution is something a qualified professional could easily deduce, then the project won’t be eligible.

Examples of Product Improvement Projects

Examples across industries help clarify how these rules apply. Let’s say you’re developing a new software platform with unique features that require solving complex integration challenges. If these solutions aren’t readily available in standard references, the project could qualify. Similarly, creating and testing prototypes for medical devices that address technical uncertainties around feasibility or performance also meets the criteria.

Another example is the development of new materials with specific, unprecedented properties, such as a composite material achieving a strength-to-weight ratio that hasn’t been seen before. It’s worth noting that nearly half (48%) of the UK’s business R&D spending as of 2025 comes from the manufacturing sector, highlighting the significant role of such projects in product development. Additionally, since 1 April 2023, mathematical advances are now recognised as scientific progress for R&D purposes, further expanding opportunities for technology-focused projects.

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What Qualifies as an Improved Product for R&D Tax Relief

While developing new products often captures attention, improving existing products can be just as challenging, especially when it comes to tackling significant technological uncertainties. For an improvement to qualify for R&D tax relief, it must go beyond basic upgrades or minor adjustments. The enhancement must push the boundaries of scientific or technological understanding, surpassing the established industry standards. If the improvement is something that existing knowledge or standard practices can easily address, it won’t meet the criteria. Simply adopting technology that’s new to your company but already common in your industry doesn’t count.

To qualify, the improvement must solve a genuine scientific or technological problem - something that cannot be easily resolved using existing knowledge. For instance, changing ingredients solely to improve a product’s flavour wouldn’t qualify. However, modifying a recipe to achieve a longer shelf life without compromising flavour, and doing so by overcoming real technological challenges, could make the project eligible.

Eligibility Requirements for Product Improvements

HMRC sets clear expectations for what constitutes a qualifying improvement. The project must achieve measurable progress in areas like functionality, efficiency, or sustainability, going beyond what’s already known in the field. It’s essential to show that the work involved systematic research or experimentation aimed at solving uncertainties that couldn’t be resolved through routine methods.

Additional factors can also determine eligibility. For example, if combining well-understood components leads to unexpected challenges - known as system uncertainty - and a skilled professional cannot predict how these components will interact, the project may qualify. Similarly, if you’re recreating an improvement that exists as a trade secret, your work could still be eligible since the details of the original improvement were not publicly accessible.

Examples of Product Improvement Projects

Manufacturers often find that projects addressing genuine technological challenges can qualify for R&D tax relief. As Thomas Hayden, Research & Development Director at Moore Kingston Smith, notes:

"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."

For example, developing a new packaging tool that cuts material waste or boosts production efficiency using non-routine technological methods would typically qualify. Similarly, creating a lighter automotive component that requires solving material-related uncertainties to maintain strength while reducing weight is another example of eligible R&D. In the food and drink sector, projects like inventing new preservation techniques or designing sustainable packaging materials - provided they involve scientific challenges beyond routine practices - may also qualify.

However, routine tasks like maintaining manufacturing stability, using standard surveying methods, or making minor tweaks to existing processes without addressing genuine uncertainties would not meet the criteria. The improvement must tackle challenges that go beyond everyday industry knowledge.

Comparing New Products and Improved Products

When it comes to R&D tax relief, both new and improved product projects can qualify, but the requirements differ. New product projects must push the boundaries of industry knowledge, while improved products need to demonstrate a significant change - something far beyond routine tweaks or minor adjustments. Here’s a closer look at how these two categories differ.

The level of uncertainty involved is a key distinction. Developing a new product often centres on exploring technological feasibility and building initial concepts. In contrast, improving an existing product focuses on achieving specific performance goals - like greater durability, less waste, or enhanced efficiency - when the solution isn’t immediately obvious to an expert in the field.

The scope of work also varies. New product projects typically involve a wider range of activities, such as creating proofs of concept, building prototypes, and conducting foundational research. On the other hand, projects aimed at improving products usually target specific technical challenges. It’s worth noting that routine upgrades or cosmetic changes won’t qualify as R&D. To meet the criteria, improvement work must go beyond standard maintenance or minor refinements.

Comparison Table: New vs Improved Products

Here’s a breakdown of the main differences:

When claiming R&D relief for improved products, it’s essential to document your starting point to show how your work resulted in a meaningful improvement rather than routine maintenance. For new products, focus on explaining why the solution couldn’t have been easily deduced by a knowledgeable professional. This approach is vital for both categories but especially critical for proving that your work exceeds standard industry practices.

The Merged R&D Tax Relief Scheme from April 2024

From 1 April 2024, HMRC introduced a unified framework for R&D tax relief, merging the SME and RDEC schemes. This means that both new product development and enhancements to existing products now follow the same set of qualifying rules. Under this updated scheme, R&D relief is provided as an "above-the-line" expenditure credit. In practical terms, this means the relief is shown as taxable income in your profit and loss account, rather than being deducted from your Corporation Tax liability.

Key Changes to R&D Relief

Two major changes apply to all R&D projects under the new framework:

• Subsidised Expenditure: Subsidies, including R&D grants, no longer reduce the amount you can claim.
• Subcontracting Rules: The party carrying the financial risk for the R&D work can claim the relief, regardless of who carries out the actual work.

However, there’s a new restriction on overseas expenditure. To qualify, most R&D activities must now take place within the UK. This affects costs related to staff, subcontractors, and externally provided workers. These adjustments form the foundation for the revised relief rates and benefits outlined below.

Relief Rates and Benefits

The merged scheme offers a headline rate of 20% on qualifying R&D expenditure, but the net benefit depends on your company’s tax position:

• Profitable companies paying the 25% main Corporation Tax rate typically see a net benefit of 15%.
• Loss-making companies or those paying the 19% small profits rate receive a slightly higher net benefit of 16.2%.

For SMEs with high levels of R&D expenditure, the Enhanced R&D Intensive Support (ERIS) scheme offers additional relief. To qualify, R&D spending must account for at least 30% of total company expenditure. Eligible companies can claim a total deduction of 186% of qualifying costs, resulting in a cash benefit of up to 26.97% (commonly rounded to 27%) for every £1 spent on qualifying R&D. Additionally, the PAYE cap for claims is set at £20,000 plus 300% of your company’s relevant PAYE and National Insurance contributions.

If your company’s R&D intensity drops below the 30% threshold in a given year, there’s a grace period. During this time, you can still claim ERIS for one additional year, provided you met the threshold and claimed successfully in the previous 12-month accounting period.

Claim Examples: New Products vs Improved Products

Let’s look at two scenarios in manufacturing. Imagine a company creating a brand-new AI-powered quality control system for production lines. This falls under new product development because the main challenge is whether the system can even be built. The uncertainty here isn’t something a skilled professional can easily solve - it requires pushing the boundaries of what’s currently known. The entire process, from design to prototyping, qualifies as it contributes to advancing industry knowledge. This underscores the importance of demonstrating clear technological uncertainty when claiming for new developments.

Now, compare that to a company aiming to improve an existing manufacturing process by reducing waste. In this case, the focus is on achieving a specific improvement, like automating a manual assembly process while ensuring quality standards remain intact. The uncertainty lies in whether this enhancement can be achieved through scientific methods. However, only the parts of the project tackling the core technological challenge qualify for relief. This example shows how crucial it is to clearly define which parts of a project meet the criteria.

Both types of projects can claim relief: 15% for profitable companies, 16.2% for loss-making firms, and up to 27% for R&D-intensive organisations.

Comparison Table: Claim Examples

The real difference isn’t in the relief rates but in how much of the project qualifies. New product development typically involves a broader range of activities, while improvement projects need a clear separation between qualifying R&D efforts and routine upgrades.

Conclusion

Understanding the difference between creating something entirely new and improving an existing product is crucial when it comes to determining your claimable costs. Both scenarios must meet the same core criteria: there must be a scientific or technological uncertainty that even an expert in the field cannot easily resolve, and the resolution must represent progress for the field as a whole - not just for your business. This distinction plays a key role in shaping how you document and strategise your claims.

For new products, you’ll need to show that your solution didn’t exist before. For improvements, you must demonstrate that the changes go beyond routine upgrades. Accurate and thorough documentation is non-negotiable. With HMRC ramping up enforcement - partly in response to over £4 billion in fraudulent and ineligible claims - the stakes are higher than ever. Under the merged scheme, which applies to accounting periods beginning on or after 1st April 2024, first-time claimants must notify HMRC of their intent within six months of their accounting period end. Additionally, all claims must include detailed narratives signed off by senior officers.

"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." – Thomas Hayden, Research & Development Director, Moore Kingston Smith

Whether you’re building a groundbreaking AI quality control system or refining an existing assembly line with automation, it’s essential to separate your qualifying R&D activities from routine tasks. The process can be complex, but working with specialists like Zest R&D Tax Advisors can help you navigate the rules. They’ll ensure your claims are accurate, compliant, and optimised to maximise relief while avoiding costly inquiries from HMRC.

FAQs

What is a scientific or technological uncertainty for R&D tax relief?

A scientific or technological uncertainty occurs when a company is trying to push the boundaries of knowledge or capability, but the answer isn't clear-cut, even to a skilled professional using the information or tools currently available. In other words, it’s when the solution to a challenge isn’t immediately apparent or accessible through existing practices or publicly available data.

According to HMRC, these uncertainties must address a real gap in scientific knowledge or technical ability. Routine tweaks or using established methods generally don’t qualify. To fit the criteria, your project should involve genuine experimentation, testing, or modelling, where the outcome isn’t known from the outset.

Zest R&D Tax Advisors can assist in identifying and documenting these uncertainties, ensuring your claim aligns with HMRC’s guidelines and helps you make the most of available tax relief.

How do the recent R&D tax relief changes impact overseas costs?

Recent changes to R&D tax relief rules have tightened the restrictions on overseas spending. In most cases, expenses incurred outside the UK no longer qualify for relief unless they satisfy the new contracting-out criteria. These criteria evaluate whether the overseas activity is absolutely necessary due to factors such as geographical, environmental, or legal limitations.

For businesses involved in R&D outside the UK, it’s essential to carefully assess these updated rules to confirm eligibility. If you’re uncertain about how these changes might impact your claim, consulting with a specialist can help you stay compliant and make the most of your relief.

What documents do I need to support an R&D tax relief claim?

To claim R&D tax relief successfully, you must provide clear evidence of both the R&D activities conducted and the costs involved. HMRC expects a well-organised submission, including the following:

• Technical narrative: This should outline the scientific or technological challenges faced, the hypotheses explored, and the steps taken to address them.
• Detailed cost breakdown: Include qualifying expenses such as staff wages (supported by timesheets or project allocations), consumables, software licences, and subcontractor fees (with invoices and contracts as evidence).
• Grant or funding documentation: Record any grants, subsidies, or tax-exempt funding that reduced costs, along with any relevant HMRC correspondence.
• Accounting records: Provide full financial records for the claim period, such as payroll extracts, purchase orders, and bank statements, ensuring all figures are in sterling (£).

Maintaining up-to-date and accurate records not only ensures compliance with HMRC requirements but also makes the claim process smoother. Zest R&D Tax Advisors can support you by compiling the necessary documents, preparing the technical narrative, and ensuring the claim is precise and complete - helping to avoid unnecessary delays or questions.

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