R&D Explained: Everything Businesses Need To Know About Research And Development

16-08-2022

By Matilda Hayward

This article will help businesses to understand the ins and outs of research and development to give context behind claiming R&D Tax Relief.

What is the definition of R&D?

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”.

What is research and development?

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 either improve or create new processes, technologies, products or services.

Why is R&D important?

Research and development is an essential part of how businesses grow. R&D
might improve efficiency and greater 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. The government recently announced that investment in R&D would 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?

Research and development 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 projects count as R&D?

To define research and development projects for claiming tax relief, HMRC looks for three main areas of scientific or technological activity. Under these UK government’s guidelines, R&D projects must:

1)     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 field, not just for your business). Most businesses start research and development when existing tools are not able to help them meet their business. To progress with their work companies will looking for an advance by undertaking a period of research, experimentation, testing, analysis and development.
 
2)     Overcome scientific or technological uncertainty
At the start of the project, there can’t be a straightforward solution. Businesses need to 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.
 
3)     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 personnel are needed for R&D?

There’s a vast range of personnel who conduct R&D 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, research and development 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 & Beverage, Health & Pharmaceuticals, Manufacturing, Oil & Gas, Software and Transportation.
 
Regarding R&D relief, the advance cannot be in social science like economics or a theoretical field such as pure maths.

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.
 
Larger businesses often commit large amounts of money to R&D. In 2019, the UK business sector invested £25.9 billion in R&D expenditure. The top UK company investing in R&D in 2019 was GlaxoSmithKlein, which invested £4.5 billion.
 
The good news is that 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.

What is an example of R&D?

We have plenty of research and development case studies, which include R&D examples:
 
MPN UK Limited: Consulting structural engineers who convert, reuse and re-purpose existing buildings.
 
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.

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.

What are the different categories of research and development?

There are no official categories of R&D, but UKRI (UK Research and Innovation)’s four categories can help us understand the different types of projects that companies undertake. These include:
 
1)   fundamental research
Fundamental research (or basic research) is purely experimental or theoretical. It’s often driven by curiosity, helping to expand knowledge in a specific area. It doesn’t have any immediate practical application or usage.
 
2)   feasibility studies
Feasibility studies explore the viability of a project, examining the project’s potential and chance of success. It will help the decision-making process by identifying the project scope, including what resources will be needed.
 
3)   industrial research
Industrial research is the investigative process that leads to gaining new knowledge and skills to improve existing products, processes or services or to create new ones.
 
4)   experimental development
Experimental development uses a variety of scientific, technological and business knowledge and experience to develop or improve products, processes or services significantly. It might involve prototyping, demonstrating, piloting, testing, and validating ideas.

What are the different phases of R&D?

In the influential book Product Innovation: Leading Change through Integrated Product Development David L. Rainey identified six different phases of development. Qualifying R&D activity for claiming tax credits varies for the different phases, but their work is a useful reference for understanding best practice for how businesses approach the R&D process.

1)     Identifying new opportunities: Idea Generation
Idea generation or ‘ideation’ is where every part of the company gathers ideas, including business departments, teams and individuals. Discussions and meetings will identify and assess new ideas for development.
 
2)     Concept Development and Selection 
After ideation is complete, businesses will have a list of approved candidates for potential research and development. Now it’s time to choose. Concept development and selection involve evolving new ideas into clear concepts that can be ranked, screened, and selected for development.
 
3)     Definition
The definition phase scopes out the project by creating objectives, guidelines performance measures and responsibilities. It enables the project by setting the stage for planning, management, communications, execution, and control.
 
4)     Design and Development 
Design and development look at both creation and implementation. It often encompasses design, marketing, production and/or delivery methods, and understanding the financial implications.
 
5)     Validation 
Decisions and outcomes are evaluated and tested to make sure that the new process, product or service meets customer and/or stakeholder expectations.
 
6)     Pre-commercialisation and launch
 
This phase finalises resources for launching the product or service to the market. This might be completing the marketing or committing the financial resources to delivery before launch.

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. Tax relief is available for SMEs (SME Tax Relief) and larger businesses (Research and Development Expenditure Credit – RDEC.

How can my business claim R&D Tax Credits?

For over 12 years we’ve helped businesses maximize 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.

Keen to find out more?

Speak to our team

Author

Matilda Hayward

Principle Consultant