Industries like engineering and manufacturing are innovating all the time. Engineers solve processing challenges. Product developers reformulate products. Technical teams run trials to improve yield, texture, stability or shelf life. Yet, this kind of work is rarely thought of as research and development. Instead, it’s called “troubleshooting”, “optimisation”, or “just meeting a customer’s brief.”
But from a tax perspective, activities like these involve experimentation to resolve uncertainty, which may qualify them as R&D for tax purposes. If a project does qualify as R&D, it’s eligible for R&D Tax Credits, a government incentive that can give you up to 35% of eligible R&D expenditure.
The problem is that if companies don’t know that there’s R&D happening within their own walls, they also don’t realise that they’re missing out on tax relief. To make matters worse, when activities aren’t initially recognised as R&D, the work is often not very well documented. Without evidence, tax relief claims become all the more unlikely.
This means that far too many eligible companies in Ireland are missing out on tax credits. Not because they’re not inventive enough, but because they don’t have the processes in place to capture the “hidden” R&D that’s happening.
Money is lost, opportunities for growth are missed, and businesses can’t optimise their processes to make their innovation more efficient.
In this article, we explain why so many companies miss out on R&D Tax Credits, and how adopting “Lean Thinking” can uncover hidden R&D and help to optimise their innovation. We do this by introducing our Overall Innovation Capture (OIC) framework, which can be used to optimise innovation processes and maximise R&D claims.
Why are companies hesitating to claim R&D?
Founders and innovators tend to see R&D Tax Credits as a growth opportunity. Any money that’s claimed can be used to fund new hires, new machinery, or even new R&D projects.
Chief financial officers (CFOs), however, will look at tax credits through a lens of risk,
compliance and audit defensibility. They may (quite rightly) ask:
- Can this work be classed as R&D?
- Have we documented our activities so that we know what to claimfor?
- Do we have the evidence to satisfy Revenue?
While the financial relief would obviously be welcome, many companies hesitate because they don’t want to risk making a mistake and facing an audit from Revenue.
But it’s also in a company’s financial interest to claim the relief they’re entitled to. R&D should never be invisible (if it is, it is a huge, missed opportunity), so processes need to be in place to consistently and defensibly identify and capture eligible activity.
What Lean Thinking teaches us
In the 1950s, poor productivity at Toyota led to the creation of Lean Thinking, which turned the
struggling automaker into a global production powerhouse. Lean production systems introduced metrics such as Overall Equipment Effectiveness (OEE) to help manufacturers understand how well they’re using their resources. Instead of asking whether machines were productive in general, OEE broke performance into measurable components. Once losses were visible, companies could then systematically improve them.
The same logic can be used to make innovation and eligible R&D activity more visible.
Measuring R&D with Overall Innovation Capture (OIC)
To give CFOs the certainty they need to claim R&D Tax Credits, we can use a simple diagnostic model called Overall Innovation Capture (OIC). Like OEE, OIC looks at three stages where innovation value can be lost:
- Identification: How much technical work is recognised as innovation?
- Documentation: Are the results from experiments and trials recorded in a way that creates usable evidence?
- Conversion: How much innovation is successfully claimed via R&D Tax Credits?
Weaknesses at any of these stages can create value leakage, where eligible R&D projects are either missed entirely or qualifying activities and expenditure fail to make it into the final claim.
But the issue isn’t just that R&D Tax Credits can go unclaimed (although we’d argue that missing out on a financial benefit is a big problem), it’s that if innovation is invisible within an organisation, it can’t be optimised. It also means that opportunities for technical learning, capability development and making experimentation and innovation more efficient are missed.
Perhaps the greater problem is that most companies don’t have any clear process or system in place to measure their innovation at all. In this case, even highly innovative organisations may capture only a fraction of the innovation occurring within their operations.
How Leyton can help
At Leyton, we help our clients uncover hidden R&D activity. We take the innovative work your team has already done and turn it into real business value through R&D Tax Credits.
We’re here to do all the hard work for you: identify eligible activities, gather the paperwork, and build the claim from start to finish. Using our in-house team of technical and accounting experts, along with our deep understanding of Revenue’s requirements, we’ll make sure your claim is accurate, well-evidenced and that no eligible R&D activity is missed.
We also work with our clients to build their understanding of how claims work, so they can put the right processes in place to unlock greater value from future R&D claims. Our client, Engineering Design Consultants (EDC), said:
“After every claim, we feel we’re a little bit wiser about the claims process, thanks to Leyton’s guidance. Over our time working together, Leyton has helped us better understand how to identify R&D projects and what is needed to prepare successful R&D Tax Credit claims.”
Do you want to make your existing innovation more visible? Let’s talk.
