Innovation is essential for businesses who want to stay competitive and foster growth. One of the essential elements driving this innovation is Research and Development (R&D). The significance of R&D is acknowledged by the UK government, which offers tax incentives to encourage businesses to invest in it. From our experience, businesses often underestimate how innovative they actually are – not realising that some of their projects count as R&D (and therefore missing out on valuable government tax relief as a result). As such, this article introduces the fundamentals of research and development to give context behind claiming valuable R&D Tax Credits.
What is the definition of R&D?
Most people will know that R&D (or R+D) is an abbreviation for ‘research and development’. Collins Dictionary defines R&D as “the part of an organisation that works to improve its products and develop new ones, or the activity of doing this”.
The UK government defines research and development as “the creative and systematic work undertaken to increase the stock of knowledge”. In other words, it’s about finding new solutions to overcome challenges. Businesses generally conduct research and development to improve or create new processes, technologies, products or services.
What projects count as R&D for claiming tax relief?
To define research and development projects for claiming tax relief, HMRC looks for three main areas of scientific or technological advancement. Under these UK government’s guidelines, R&D projects must:
Look for a scientific or technological advancement
R&D projects must create an advance in science and technology in relation to a process, product or service (the advance must be for the overall industry, not just for your business). Most businesses start research and development when existing tools are not able to help them meet their business needs or new market demands. To progress with their work, companies will look for an advancement in either knowledge or capabilities by undertaking a period of research, experimentation, testing, analysis and development.
Overcome scientific or technological uncertainty
At the start of the project, there can’t be a straightforward solution. Businesses must show that the challenge was complex and that conducting R&D was the only way to find a solution. In other words, an informed expert on the subject shouldn’t be able to work out your advance easily. Businesses must explain what the blockers were and show a scientific or technological uncertainty on how to reach the solution.
Use a systematic approach
Iteration is the bare minimum of any R&D project. R&D must deploy systematic research, testing and analysis to develop robust solutions. You can’t just stumble across a solution. Businesses won’t get the answer the first time, but the learnings that come through trial and error will steer companies towards success. It’s fine if there are many failures and course corrections, as it’s expected that businesses will need to undertake a substantial piece of work to get to the end goal.
How do I know if I’m carrying out R&D
Suppose your company is taking risks or working on technically challenging projects which attempt to resolve scientific or technological uncertainties. In that case, your business is likely carrying out qualifying activity.
If the answer to any of the following questions is yes, then it’s likely that you’re carrying out R&D:
- Do you have to do full design or improve the design process?
- Have you carried out new product development?
- Do you reduce the number of steps in a process by adapting your existing methodology?
- Is the solution to your problem not readily available?
- Do you undertake testing or make prototypes?
- Do you develop backend software systems?
What is R&D in a business context?
Research and Development (R&D) in a business context refers to the process of innovating, designing, developing, and enhancing products, services, technologies, or processes. This process is driven by a desire to stay competitive in the market, meet customer needs, improve existing products or services, or create new ones.
Businesses conducting R&D are eligible for R&D Tax Relief (also known as R&D Tax Credits) – a UK government incentive designed to encourage companies across all sectors to invest in innovation. This scheme allows businesses to either reduce their taxable profit or claim payable cash credits as a proportion of their R&D expenditure.
For businesses claiming tax relief, it’s not just for ‘white lab coat’ scientific research that qualifies. Any project or activity that seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty could potentially qualify.
Why is R&D important?
Research and development is an essential part of how businesses grow. R&D
might improve efficiency and productivity and help companies bring a new product or service to the market. A breakthrough in R&D can give a business a competitive edge, leading to greater profits.
But R&D is not only crucial for businesses themselves. The UK government considers R&D vital to the successful future of the British economy. R&D unlocks the future by driving innovation and invention in science, engineering and technology. For example, R&D was essential to developing a COVID-19 vaccine, and future technological advances are seen as critical to hitting our carbon emissions target by 2050. For example, the government believes that investment in R&D will be part of a plan to create a 5G and 6G mobile network ecosystem.
Research and development is so intertwined with the UK’s economic growth strategy that they published a UK Research and Development Roadmap and have committed 2.4% of GDP by 2027 to support ongoing innovation. This support comes from corporation tax relief on research and development (R&D) projects.
What are the benefits of research and development?
R&D allows businesses to innovate constantly, which creates a host of benefits that can lead to greater profits, including:
- Driving the development of new products, services and processes.
- Keeping older products up to date by adapting, reinvigorating and improving them.
- Creating competitive advantages by developing unique technologies.
- Providing better benefits to customers and stakeholders such as cheaper, safer and more efficient products and services.
What personnel are needed for R&D?
There’s a vast range of R&D personnel within an organisation.
It’s not unusual to see scientists, researchers, engineers, software engineers, and entrepreneurs conduct R&D, but it’s important to remember that it’s not just limited to research and development departments. There are nearly 500,000 full-time, full-time equivalent R&D-related roles in the UK. 65% of these are researchers; the others were technicians and admin staff.
Which sectors conduct R&D?
Generally, R&D takes place in software, science and engineering industries. In practice, a wide range of sectors conduct R&D to innovate scientifically or technologically to develop an advance in their field.
Example sectors include Agriculture, Architecture, Construction, Energy, Engineering, Financial Services, Food and Beverage, Health and Pharmaceuticals, Manufacturing, Oil & Gas, Software and Transportation.
To claim R&D relief, the advance cannot be in social science like economics or in the arts or humanities sectors.
How much does R&D cost?
It’s difficult to put a price tag on research and development costs as it will vary from business to business and from project to project. Companies wanting to conduct R&D will need to bear in mind costs for worker salaries, sub-contractors, externally provided workers, consumables and software licences.
Large businesses often commit big amounts of money to R&D. In 2021, the UK business sector invested £66.2 billion in R&D expenditure.
What is an example of R&D?
We have plenty of research and development case studies, which include R&D examples from businesses:
MPN UK Limited: Consulting structural engineers who convert, reuse and re-purpose existing buildings.
Nutmeg: Digital wealth manager that uses innovative technology to transform the wealth management industry and invests significantly in products and technology to deliver new features and benefits to customers.
Alex Thomson Racing: Professional ocean racing team who develops and optimises their boats and improves their business operation through R&D.
FGP Systems: Precision engineering company that offers high-end engineering and manufacturing solutions for the aerospace industry and other sectors.
WalkUp: Innovators who built an app that predicts wait times for restaurant tables when people join a virtual queue.
Do companies need a department for R&D?
No! Companies can have their own dedicated research and development department if R&D is an ongoing activity for a business, but it’s not a requirement. Any department undertaking substantial development to overcome a hurdle, such as creating a new piece of software or technology, could potentially have conducted R&D.
Does there need to be a commercial output from R&D?
Not necessarily. By the very nature of research and development, there will always be failures, and it is possible to claim R&D Tax Relief on unsuccessful projects. It’s not the commercial output that’s important but the technological steps to get there and the challenges within.
What is the R&D Tax Credits scheme?
The UK R&D Tax Credits scheme allows companies to reduce their corporate tax bill or receive a tax refund based on a proportion of their R&D expenditure. The scheme’s main objective is to increase the quality and quantity of UK research and development, attract foreign direct investment, and encourage domestic R&D activity.
A business can use the R&D Tax Credits scheme to reduce their tax liability if they carry out qualifying research and development (R&D) activity; this is known as R&D Tax Relief. Both profitable and loss-making companies can claim R&D Tax Credits.
What type of businesses can benefit from R&D Tax Credits?
The scheme is for any organisation liable for corporation tax in the UK and meets the necessary R&D criteria.
There are two types of R&D tax relief schemes:
For expenditure incurred up until 1st April 2023 SMEs in the UK can receive up to 33% of R&D costs in tax credits, and larger organisations can claim 13% back on their qualifying R&D expenditure through the RDEC scheme. After 1st April 2023 the rates go up to 27% for R&D intensive loss-making SMEs and up to 20% for the RDEC scheme.
How can my business claim R&D Tax Credits?
Since 2009, we’ve helped UK businesses maximise their R&D Tax Relief claims. Not only do we have highly qualified tax experts, our technical consultants have field experience across a range of software, science and engineering industries. This uniquely allows us to understand and identify all the areas where you can claim R&D Tax Credits.
Speak to our team to find out how we can unlock considerable savings for your business.
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