In order to understand research and development (R&D) in business, it is useful to define it, explore its role and wider importance. This will enable us to look at how R&D is funded, including via R&D tax incentives.
What is research and development?
Research and development is the generation of new knowledge. In a business context, it is an activity that companies undertake in order to develop new products, processes or services, or improve those that already exist. In order to do this, businesses often take on risk. This is because uncertainties exist around if what they are attempting is technologically feasible, or, more commonly, they don’t know how they will achieve their objectives in practical terms.
R&D is an essential function for many businesses. Launching a new offering or improving an existing one is a way for a business to remain competitive and make profit.
When developing a new product, process or service, or refining an existing one, R&D is one of the earliest phases. Experimentation and innovation are often prolific at this stage, along with risk. The R&D cycle typically begins with ideation and theorising to identify issues or opportunities, followed by research and exploration to see what’s feasible. The next phase is then design and development.
What sectors does R&D occur in?
Research and development occurs across a wide range of sectors and industries, and in companies of all sizes. These range from R&D-intensive industries that rely heavily on R&D projects like pharmaceuticals, life sciences, automotive, software and technology, to areas such as food and drink.
Types of research and development
There are two main types of research within R&D – basic research and applied research.
- Basic research is all about acquiring knowledge and using it to build understanding and intelligence that a business can use to its advantage. This knowledge can be the foundation for further R&D projects and feed into strategic business decisions.
- Applied research is a lot more defined, and often looks to achieve a specific objective. This could be using a new technology, reaching a new market, improving safety or cutting costs. Applied research is generally what leads to the development phase.
The design and development phase entails taking an idea and making it into a product or process. Effectively, it’s about translating the research into a commercial product or service. It often involves designs, prototyping, trials, testing and refinement.
Prototyping is key to the development phase as it allows you to identify and overcome issues, and improve the design. Eventually, those in manufacturing development might move into manufacturing trials where the product is produced on a larger scale.
R&D can be set-up to look at different outcomes as follows:
New product research and development
R&D and product development often go hand in hand. Rapid changes in consumer demands and emerging technologies means there’s always a need to adapt. Before developing new products, you need a deep understanding of the market and user needs. This lays the groundwork for development.
Various concepts are generated and tested at the outset. These can then be prototyped for further research and testing.
Improving existing products and processes
The continual evaluation of existing products, services and processes is also a key part of R&D. If a product, service or process is no longer profitable or adding value in a market then it risks stagnating.
It could also be that technology has been developed that could facilitate improvements that may cut costs, make efficiency gains or improve safety. This can include improvements to the manufacturing and production processes of the product.
Legislative changes or shifts in user needs can also mean a product or process must change or evolve to remain viable.
Research and development examples
Take a look at our case studies to see some real life R&D examples.
R&D projects
Research and development projects are set up to achieve a range of objectives and business needs. These could be around introducing a new product or service, improving an existing process or utilising a new technology.
As technology has evolved, it’s become increasingly likely that more sophisticated forms of it may play a part in the R&D process. Artificial intelligence’s (AIs) ability to take large amounts of data and seamlessly process it, for example, is leading to process efficiencies across all sectors.
Often R&D projects will have unknowns and uncertainties at their core – and the R&D is aiming to resolve these. It is this uncertainty that forms a core element of the definition of R&D for tax purposes.
An example of an R&D project could be to migrate a legacy system onto the cloud, automate an aspect of the manufacturing process, or utilise new materials to improve performance.
Research and development in business
With emerging technologies, the focus on sustainability, brand reputation and supply chain management, R&D in business is more important than ever. Although many businesses have an R&D function, how R&D actually looks on the ground varies dramatically. R&D intensity also differs dramatically between industries and individual companies.
What is R&D in business?
Businesses will approach R&D in different ways, with different organisational structures implementing different R&D strategies. How R&D is leveraged internally also varies dramatically between businesses, having a significant bearing in terms of its overall impact.
Some businesses won’t have the capability to do R&D in-house so will outsource it, relying on others to drive innovation. Some businesses choose to outsource their R&D while others have R&D departments entirely dedicated to R&D.
R&D is a complex function within any business and often comes with its challenges. Many R&D leaders struggle to reduce development times as well as plan a roadmap for the future more effectively. Building a culture of innovation across a business through R&D is often a goal for many businesses but one that is also hard to achieve.
R&D strategy
It’s not enough to simply carry out R&D. In order to make the most out of an R&D function, you need to strategise. Whether you want a competitive edge, a first mover advantage to capitalise on a new technology, to keep up with a competitor or break into a new market – how you plan and strategise around R&D is around R&D is critical to its success.
An R&D programme that is strategic will reap benefits. When combined with R&D tax credits, it becomes even more advantageous. You may want to adapt your R&D processes and planning to make more use of R&D tax credits. The ultimate goal is for R&D to permeate a company’s culture and approach to business.
The uncertainty at the heart of the potentially most lucrative R&D projects can be mitigated financially by the use of R&D tax relief. You can be rewarded for taking more risks. This helps effect a change in mindset when approaching risky projects. This is where our sector experts and chartered tax advisers come in. At ForrestBrown, we work closely with businesses to help them make the most of their R&D.
How to promote a culture of R&D in your business
Read more about the benefits of promoting a culture of R&D in your business.
R&D costs
Research and development can be expensive. Emerging technology and highly specialised staff, all come at a price. The fact that the costs are upfront without any guarantees of return on investment understandably makes many CEOs apprehensive. Yet it remains an essential function and R&D spending needs to be factored into budgets.
In some businesses, R&D expenditure can be one of the biggest outgoings. There are annual lists published of companies that spend the most on R&D – Amazon, Samsung and Apple, for example, spend billions of dollars on R&D and frequently top these lists.
The good news is that in the UK, many R&D costs can be recovered with R&D tax credits. There are others though that don’t qualify. You can see a detailed breakdown of qualifying R&D costs here. As a business, you need to weigh up the total project cost against the qualifying costs for R&D tax credits, then decide if your project is feasible.
R&D investment
Although the costs are high, by investing in R&D a business is investing in its future capabilities. It is a good way for a business to stay competitive and keep up with shifting customer demands. Those businesses that invest in R&D can receive different forms of funding alongside R&D tax credits, such as grant funding and Patent Box relief. In terms of R&D tax credits, there’s the SME incentive as well as the RDEC incentive for large companies and grant-funded SMEs.
Find out more about ForrestBrown’s R&D consultancy service.
R&D departments
Some businesses will have a small team responsible for R&D or will undertake R&D activities through various teams and individuals on a more ad hoc basis. Other companies have a dedicated R&D department. Larger companies may even establish R&D centres, which can give them access to local R&D leaders and specialised R&D functions.
What is an R&D department?
An R&D department can contain a whole range of professionals, from R&D engineers and chemists to R&D managers responsible for the outputs. Sometimes you will have R&D leaders responsible for driving the R&D department in a business.
The role of an R&D department?
The role of an R&D department is to keep a business competitive by providing insights into the market and developing new services / products or improving existing ones accordingly. The future growth of the business sits in a large part with the R&D department.
The R&D department will have a range of responsibilities. This can be everything from understanding a target market’s needs to looking at new products to quality control.
Elmelin go into good levels of detail around the role of an R&D department.
Outsourcing R&D
Businesses of all sizes make the decision to outsource their R&D. It’s not always viable to carry out R&D in-house. R&D outsourcing means you engage other organisations to help support or run your activity. These partners can then provide you with something that you can use as a business. This spans everything from independent R&D labs to university and clinical research organisations.
It’s always worth a business considering what R&D activities they can bring in-house as this can be beneficial. In particular, in terms of R&D tax credits. We use a few worked examples to explore who can claim for R&D in complex projects.
R&D and innovation
Research and development is intrinsically linked to innovation. Innovation is a broad term and can be difficult to define. It often refers to those ideas, products, services, and methods/processes that are new and different. R&D activity and projects are one of the main ways a business will seek to innovate.
When it comes to R&D activity, innovation can mean new to your business or genuinely unique. InnovateUK suggest: “‘new to me’ innovation encompasses proven technology being applied in new and creative ways. Whilst the technology itself might not be brand spanking new, the application or product is novel.”
Although not all R&D leads to innovation, it’s unlikely that innovation occurs without R&D.
The definition of innovation for R&D for tax purposes is narrower. This means that R&D tax credits can’t be a substitute for innovation. R&D for tax purposes focuses specifically on achieving an advance in science or technology and resolving uncertainty.
Why R&D is important for business
R&D is important for businesses because it provides powerful knowledge and insights, leads to improvements to existing processes where efficiency can be increased and costs reduced. It also allows businesses to develop new products and services to allow it to survive and thrive in competitive markets.
Benefits of R&D
As we’ve discussed, R&D is important to business growth and your ability to compete in a market. A business that can innovate and adopt new technologies as well as improving existing processes is more likely to succeed in the long run.
At a wider level, the benefits of R&D extend into entire sectors as well as positively impacting the wider economy. A sector that invests heavily in R&D will develop and achieve more, including providing real-world benefits to people. You can read our report on why R&D is key to many businesses for more information.
For many countries, R&D and economic growth go hand-in-hand. Some form of R&D incentive often feature as part of a government’s plans to grow its economy. This is because they are designed to improve productivity. Successive UK governments since 2000 have made R&D tax credits a cornerstone of policy.
On a global level, spending on R&D has reached a record high of almost US$ 1.7 trillion – see Unesco. The United States and China lead the way on R&D spending. The true benefits of R&D can really kick in on a global scale where advances are made that improve the lives of inhabitants, including those most in need.
Funding R&D and innovation
As mentioned, R&D tax relief is not the only tool in the innovation incentive toolkit. For those companies that hold or exclusively license-in a granted UK or European patent, Patent Box relief may, providing that certain other conditions are met, provide a valuable incentive. It works by helping to reduce the Corporation Tax rate payable on qualifying IP income to 10%.
Grants can also provide a valuable incentive to businesses, regardless of size or sector. Schemes such as the Life Sciences Innovative Manufacturing Fund or the Industrial Energy Transformation Fund offer opportunities across particular industries, where as competitions such as the Canada-UK Collaborative R&D, support targeted R&D across a range of sectors.
Other incentives such as capital allowances may also prove important, since R&D often goes hand in hand with expenditure on capital assets such as commercial property and equipment. Capital allowances enable businesses to reduce their taxable profits by claiming deductions on that expenditure. There is no time limit on claiming capital allowances but it is worth noting that first year allowances must be claimed in the period in which the expenditure is incurred.
Claiming R&D tax credits for the first time?
If you’re new to R&D tax relief and would welcome support with claim preparation, our multi-skilled team of tax and industry specialists would be delighted to help.
What is R&D for tax purposes?
When it comes to R&D tax credits, the government has set out a specific definition of R&D. It is defined in the following terms:
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”
Let’s break this down further. To count as R&D, you need to look for three things:
Project
As well as your own R&D projects, an R&D tax claim can include work undertaken for a client. And remember, a project doesn’t have to have been successful to qualify.
Advance
For the government’s accepted research and development definition, an R&D has to seek an advance in overall knowledge or capability in a field of science or technology.
Uncertainty
If you’re not sure if your R&D project is possible, or you don’t know how to achieve it in practice, you could be resolving technological uncertainties and be carrying out qualifying R&D.
Questions?
If you have any questions around what constitutes as R&D for tax purposes or want to know if your projects contain qualifying R&D, ForrestBrown are happy to discuss it with you. Call us on 0117 926 9022.
Claiming R&D tax relief
ForrestBrown, has a deep understanding of R&D tax relief and is ideally placed to advise on it, as well as other innovation incentives, such as grants. Day in day out, we see the positive impact R&D tax incentives have on supporting and supercharging the R&D function within businesses. From hiring new staff to embarking on bolder projects, it often has a transformational impact.
When used strategically, R&D tax relief create a virtuous circle of innovation. You receive your benefit and invest it in more innovation, and then receive more relief. This can form part of a solution for overcoming challenges faced by many businesses. This includes talent acquisition and retention, competitiveness and productivity.
With our expert award-winning team we help you mitigate risk and drive innovation throughout your business. We offer end-to-end claim services as well as one-off R&D tax consultancy.