In order to understand the role and impact of R&D, it is useful to define research and development, explore its role in business and its wider importance. This will put us in a better position to look at how R&D is funded including via the government’s powerful R&D tax credit incentives.
What does R&D stand for?
R&D stands for research and development. What R&D represents in a business context and its power is a much wider and more complex area that we will now explore.
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 new offerings or improving existing ones 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 is often rife at this stage, along with risk. The R&D cycle often begins with ideation and theorising, followed by research and exploration and then into 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 intensive R&D industries that rely heavily on R&D projects like pharmaceuticals, life sciences, automotive, software and technology to areas like food and drink. R&D also plays a major role in the construction industry, in particular in manufacturing and engineering.
Types of research and development
All R&D tends to start with ideas and theories – this can relate to identifying issues or new opportunities. The R&D process then focuses on exploring and researching those ideas, seeing what’s feasible. 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 often what leads to the development phase.
The design and development phase is all about 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, for those in manufacturing development, you move into manufacturing trials where you look to produce the product 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 the user needs. This lays the groundwork for the development of the new product.
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 wants can also mean a product or process must change or evolve to remain viable.
Research and development examples
What R&D looks like varies across industries, sectors and companies. It can include large R&D projects or everyday R&D activities. Take a look at our case studies to see some real life R&D examples.
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.
Often these 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 aspect to 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 and fast-changing markets, 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. We will explore this in a little more detail.
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 their R&D, 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 and roadmap more effectively for the future. 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.
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. Regardless of your R&D objectives, 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 essential.
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 credits. You can get 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.
Research and development can be expensive. Emerging tech and highly specialised staff, all come with a price tag. The fact that the costs are upfront without any guarantees of ROI 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 those companies that spend the most on R&D – Amazon, Samsung, and Apple spend billions of dollars on R&D and frequently top these lists.
The good news is that many of the 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.
Although the costs are high, by investing in R&D a business is investing in their future capabilities. R&D investment 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 including R&D tax incentives. 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.
Some businesses will have a small team responsible for R&D or just pick up R&D activities across 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 – these 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 that look to drive 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.
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 research organisations to 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 closely 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 is 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 summarise this: “‘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 some degree of 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.
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. The new UK Government has 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 in terms of 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.
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:
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.
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.
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.
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.
R&D tax credits
At ForrestBrown, R&D tax credits is all we do. 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 credits create a virtuous circle of innovation. You receive your benefit and invest it in more innovation, and then receive more innovation. This can form part of a solution for overcoming challenges plagued 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.