The automotive sector is undergoing one of the most significant periods of technological change in its history. From electrification and battery technology to advanced manufacturing and connected vehicles, research and development is playing a central role in shaping the future of the industry. For UK automotive businesses, suppliers and manufacturers, understanding current Research & Development in the automotive sector’s landscape is essential to remaining competitive.

The UK is investing heavily in automotive innovation

The automotive industry remains a key part of the UK’s industrial strategy, with substantial investment being directed towards advanced manufacturing, electrification, automation and supply chain resilience. Government-backed programmes continue to support innovation across the automotive supply chain, with funding aimed at helping businesses develop next-generation technologies and improve productivity.

This presents opportunities not only for vehicle manufacturers but also for component suppliers, engineering businesses, software developers and specialist manufacturers.

Government-backed programmes for automotive supply chain innovation are primarily driven through the DRIVE35 programme and the Automotive Transformation Fund (ATF). These initiatives provide billions in capital and R&D grant funding to help businesses develop next-generation technologies, such as zero-emission batteries and electric motors, while scaling production and improving supply chain productivity.

You can find links to these government-backed automotive innovation programmes and their respective funding competitions below:

DRIVE35 Programme Overview

Innovation & R&D Funding Streams

Scale-Up and Capital Supply Chain Support

This level of government investment isn’t incidental – it’s targeted at where the sector’s own growth forecasts say the demand is heading. According to SMMT analysis, demand for electric motors, power electronics and drive systems (PEMD) is set to surge by more than 350% by the end of the decade, while demand for automotive electronics is expected to more than double. Demand for battery-related components – packs, modules, cells, casings, battery management software and thermal management – is forecast to more than triple by 2030. Overall, demand for UK-sourced automotive parts could rise by 80% by 2030, representing a £4.6 billion opportunity that DRIVE35 and the Automotive Transformation Fund are specifically designed to help UK suppliers capture, rather than see fulfilled by overseas manufacturers.

For component suppliers and engineering businesses, this means R&D activity in battery thermal management, drive electronics, casings and battery management software isn’t just commercially relevant – much of it will also meet the qualifying criteria for R&D tax relief, provided it involves genuine technical uncertainty rather than off-the-shelf integration.

Key areas of automotive R&D

Current automotive R&D activity is focused on several major themes:

Electrification. As the transition to electric vehicles accelerates, significant investment is being directed towards battery development, battery recycling, charging infrastructure, power electronics, and energy efficiency.

Advanced manufacturing. Manufacturers are increasingly investing in automation, robotics, digital twins, smart factories, and AI-driven production systems. These technologies help improve quality, reduce waste and increase productivity.

Connected and autonomous vehicles. The development of connected vehicle technologies continues to create opportunities for businesses specialising in embedded software, sensors, cybersecurity, data analytics, and vehicle communications systems.

Sustainable materials. Manufacturers are also investing in lightweight materials and sustainable production methods to reduce environmental impact and improve vehicle efficiency.

Many automotive projects qualify for R&D tax relief

A common misconception is that only breakthrough inventions qualify for R&D tax relief. In reality, many automotive businesses undertake qualifying activities when they attempt to overcome technological uncertainties.

Examples may include developing new manufacturing processes, improving battery performance, designing bespoke engineering solutions, integrating new software systems, and enhancing product durability or efficiency.

Each project should be assessed on its own merits, but many businesses are carrying out qualifying work without realising it.

New rules mean many automotive businesses are claiming on a different basis than before

Automotive businesses often focus heavily on the technical aspects of innovation while overlooking how significantly the underlying tax relief rules have changed.

The merged scheme and ERIS. For accounting periods beginning on or after 1 April 2024, the previous SME and RDEC schemes have been replaced by a single merged R&D expenditure credit scheme, paying a 20% credit on qualifying expenditure, alongside Enhanced R&D Intensive Support (ERIS) for qualifying loss-making companies. Many automotive businesses with accounting periods straddling these dates are only now filing their first claims under the new rules.

Who can claim in a supply chain. The most consequential change for this sector is around contracted-out R&D. Eligibility now generally follows whichever party decided the R&D was necessary and bore the financial risk, rather than whichever party physically carried it out. In a typical OEM-to-supplier arrangement, this can mean the OEM is entitled to claim relief on work a supplier actually performed — a reversal of the position many SME suppliers have relied on. Contracts should state clearly who is entitled to claim.

Overseas R&D. Costs relating to R&D contracted out to an overseas party are generally excluded from relief, with limited exceptions. Businesses with overseas testing facilities or engineering partners should review these arrangements now rather than at year-end.

Claim notification. Businesses claiming for the first time, or who haven’t claimed in the previous three years, must notify HMRC in advance using the Claim Notification Form, within six months of the end of the relevant accounting period. Missing this deadline means the claim cannot be made, regardless of how strong the underlying R&D is.

Official HMRC Guidance

Documentation is more important than ever

To support successful claims, automotive businesses should maintain evidence including design records, engineering reports, testing data, prototype development records, technical meeting notes, project timelines, and staff time allocations.

Strong documentation not only supports tax relief claims but can also strengthen applications for grant funding and innovation support programmes.

Frequently asked questions

What is the merged R&D scheme, and does it affect automotive businesses?

Yes. According to SMMT, UK automotive manufacturing typically invests around £4 billion a year in R&D, and most businesses in the sector with qualifying activity are now claiming under the merged scheme rather than the older SME or RDEC rules.

Could we qualify for ERIS instead?

If your business is loss-making and R&D forms a significant proportion of total expenditure, ERIS may offer more generous relief than the standard merged scheme rate – worth raising with an adviser directly.

We subcontract development work — who can claim?

Generally, whichever party initiated the R&D and bore the financial risk, not whichever party carried it out – full detail is in HMRC’s guidance on contracted-out R&D costs. This is a live issue for OEM-supplier contracts specifically and should be addressed in contract terms.

Does overseas R&D activity still qualify?

In most cases, no – costs relating to R&D contracted out overseas are now excluded, with limited exceptions.

Do we need to notify HMRC before claiming?

Yes, if it’s a first-time claim or you haven’t claimed in the past three years — within six months of the end of the accounting period. See HMRC’s Claim Notification Guidelines for the full deadline rules.

The road ahead

The automotive sector is entering a period of unprecedented technological transformation. Businesses that continue to invest in innovation, embrace new technologies and manage compliance effectively will be best placed to benefit from the significant support available through grants, collaborative programmes and R&D tax incentives.

For many automotive businesses, R&D is becoming a fundamental part of maintaining competitiveness in a rapidly evolving market.

You can read our take on the wider outlook for the automotive industry in 2026 here, as well as downloading our Outlook document to read at your leisure.

If you would like to discuss any aspect of this article or we can be of any assistance, please get in touch for an informal chat.