In a world which throws many challenges at businesses, innovation is a consistent antidote to the obstacles we all face. Doing things differently, making something new or continuous improvement.
For those UK companies that are prepared to innovate and take risks, financial support is available in the form of research and development (R&D) tax credits.
As well as gaining a competitive advantage from new or improved products, services and systems, these companies also get a boost to cash flow from the government’s R&D tax credit incentives which reward them for their investment in innovation. So far, so amazing. Yet there is a whole host of wider benefits that can be enjoyed by taking the next step and fostering an R&D culture within the business.
In this article we explore exactly what we mean by a culture of R&D and share tips on how you can embed one within your company. If more companies experience the full range of benefits of research and development, it will help them to invest further in exciting innovation, and increase the number of people working in technical jobs. Ultimately, it would help them thrive and would be great news for the UK economy too.
Importance of research and development
Why is research and development in business so important? Quite simply, it allows individual companies, and our wider economy to stay competitive. The world does not stand still, so if companies do not conduct R&D activities they will get left behind.
And when companies innovate and the economy does well, everyone benefits – through job creation, higher tax revenue, and exports. This is the government’s intention in incentivising R&D projects. Innovation is good for the world, so they want more businesses carrying out research and development projects.
Research and development in business – broadening the definition
When businesses talk about their research and development, it can be in a fairly limited sense. Often it differs significantly from how we would talk about R&D activities in business. We base ours on the broad definition that must be met in order for projects to qualify for R&D tax credits. While it is true that not all innovation counts as qualifying R&D (as important as it may be), a surprisingly wide range of projects can qualify.
Two of the key tests of qualifying R&D are as follows:
- One – you are taking a risk as to whether your outcome will be successful.
- Two – you are seeking to resolve scientific or technological uncertainties.
If you can say yes to these criteria then new product development, efficiency gains, transformation projects and systems integrations or upgrades could all be qualifying activity.
Record keeping for R&D tax credit claims: what should you be doing?
Staff costs often play a crucial part in any research and development (R&D) tax credit claim. So it's not surprising that HMRC expect to see good record keeping. That is usually fine when it comes to payroll costs, but it might be trickier when it comes to looking at what time employees spend on individual tasks.Read more
R&D tax credits are important to businesses because they provide a vital cash injection based upon the amount of money spent on qualifying R&D activities. This can be worth between 10p and 33p for every pound spent. The average claim we submit for our clients is worth more than £60,000 – and for some, it’s worth much, much more.
At ForrestBrown, we specialise in working with businesses on how to improve research and development record-keeping to optimise claims. And an important part of this is helping to make qualifying R&D visible within a business, regardless of how it’s referred to internally. We find that actually recognising which activities are innovative plays an important role in the success of future innovation.
The ideal scenario here is to create a culture of R&D. This allows you to take a strategic approach and better inform your decision-making as we explain below.
We see part of our wider mission as educating UK businesses and their advisers about R&D tax incentives, so check out all the resources on our website if they are new to you.
Why it’s important to have internal education around R&D and its value
When you choose ForrestBrown as your R&D tax credit adviser you get so much more than just a claims management service. We invest time and resources into helping you educate your team about what R&D actually is and its value to your business.
This makes everyone in your organisation better at recognising R&D and keeping the appropriate records. The best time to identify R&D is at the outset of the project. So with this understanding your staff are well placed to identify R&D projects early and to keep all the records required to make a full and robust claim.
The benefits of promoting a culture of R&D
If you are identifying R&D at the start of projects and keeping strong records you are starting to embed R&D into your company culture. This can only be a positive for your business. Better records invariably lead to larger claims. This is because the more R&D activity you can identify, the more you can include in a claim. So you immediately create the opportunity to receive a financial benefit by ensuring your staff are focused on it.
The power of R&D-informed decision making
But this is only the start. What we see when businesses create a culture of R&D is a change in behaviours. Most notably, R&D starts to get factored into the decision-making of the business. As one of our clients says:
Knowing that R&D tax credits are there focuses the mind on innovation. In my role, I always question where the innovation is so I can allocate extra staff to true R&D projects. Alan Ramsay, Finance Director, Dartington Crystal
With this insight, you can take more risk. This is because you understand that the financial risk intrinsic within innovation is reduced due to the value which R&D tax credits provide.
The culture of R&D does not just apply to outward looking projects designed for your clients or for sale in your primary marketplace. For starters, there is the fact that R&D tax credits can be just as applicable to your own internal projects – a systems integration for example. As long as it meets the qualifying criteria, it does not matter whether the project is for you or your customers.
People power – hiring new staff, inspiring existing employees
And then we come on to your people. Because people are what culture is all about. In a landmark national survey we conducted in 2016 called Nation of Innovators, we discovered that nearly half of businesses reinvest the money they receive from R&D tax credits into hiring new staff.
This is great for each business as they bring in new skills, more capacity and fresh perspective. And, of course, such job creation is also fantastic for the wider economy. In some sectors where there is a shortage of skilled staff, it brings into focus this pressing need. This can lead to wider and more significant change in how we approach the education and training of future generations.
As well as helping to fund new hires, an R&D culture enriches the experience of existing staff which is important for retention. When everyone sees the value in R&D, innovative approaches and creative thinking start to be the norm. Your business becomes awash with positive attitudes and staff that relish a technical challenge.
A client of ours, one of the UK’s top 20 design and build digital agencies, relates the positive effect that having an R&D culture has on their recruitment and retention:
It [the R&D tax credit] also gives us a tremendous boost to our efforts to recruit and retain talent. Developers enjoy the R&D part of their job, so the more we can offer them, the happier they are, and the more they want to join or stay with us. It contributes to a great workplace culture. James Cannings, Co-Founder and Chief Technology Officer, MMT Digital
Tips on how to promote a culture of R&D effectively
For all our clients, ForrestBrown helps to instil a culture of R&D. Below we outline how we do it. And even if you don’t use us for your R&D tax credit claim, we hope you’ll be able to take away some learnings which you can apply yourself.
When preparing a first claim we do a deep dive into your business, understanding all the functions and identifying what triggers R&D. This initial contact is normally with your tax and finance teams but we don’t stop there.
We’ll speak with the competent professionals within your business. The positive impact of getting the buy-in of the people driving, or directly working on, the innovation, should not be ignored. By involving them in the R&D planning process it can open up the opportunity for further innovation. And it gives them a voice within the business.
We recommend some internal education and comms around R&D tax credits, and happily deliver this ourselves upon request. Our passion for R&D tax credits and the innovation they inspire can be infectious. Our attention to detail also ensures that the R&D component of any project is discussed at the outset, at the same time as approval and budgeting.
Do you need to nurture an R&D culture in your business?
Whether you’ve claimed R&D tax credits before or are new to this valuable tax incentive, we can add great value to your business. We’ll help you embed an R&D culture as we manage your claim.
Our team consists of chartered tax advisers, chartered accountants, former-HMRC tax inspectors and sector specialists. We’re two-time winners of the coveted ‘best independent consultancy firm’ at the Taxation Awards, and have won a string of other awards for our high-touch service.
If you want to educate your team about R&D and unlock the full potential of R&D in your business, contact ForrestBrown.