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What is R&D for business?

Understanding the meaning and role of R&D and innovation for UK businesses

Most people know that R&D stands for research and development but it’s important to understand what is meant by research and development. We can consider this in a general business sense and then, specifically, what definitions are used by HMRC.

Understanding the definition of research and development will help us see the full range of options for funding innovation, particularly through R&D tax credit incentives.

What is research and development?

Research and Development is defined as any activity that leads to the innovation of new products, processes, or services or improvements to those that already exist.

To put it simply businesses are looking for solutions but they aren’t sure how or if they will be successful. Inevitably there is risk involved because uncertainties exist around what is being developed.

R&D is at the heart of any business that is trying to stay competitive and profitable by launching new products, adapting for new markets, or improving the existing offering.

Here at GovGrant, we know that UK businesses are innovating every day. Work that may not even be recognised as innovation. Our clients may believe “It’s just what we do” but if that work involves finding new approaches, solving problems, future-proofing, then it could and should be considered as R&D. 

What is the R&D cycle?

GovGrant-innovation-life-cycle-22

The R&D cycle shows the flow of innovation in business and the typical steps that define the process.

Ideas and concepts – this is the germ of an idea where the journey begins, this can come from a change of legislation, a technological breakthrough, or striving for efficiency or cost-saving.

Designs and modelling – the technical analysis, design, development activities that are needed to resolve the uncertainty or meet the challenge.

Trials and testing – this phase is iterative and is used to highlight potential issues and suggest tweaks to improve the design, sometimes using a prototype. There will be feedback into the design and development process.

Production and implementation – this is the phase where products or processes are scaled up to full manufacture or implementation.

Revenue and generation – this is the ultimate objective, although not all R&D projects are successful. This is the phase where R&D moves into business as usual.

Why R&D is important to businesses

It promotes:

  • Product development to respond to changes in consumer demands
  • Adapting to emerging technologies
  • Improving the efficiency, safety, profitability, and scope of existing products and processes
  • Responding to meet new legislative or regulatory requirements
  • Adapting a product or process to meet the needs of a new market

Which sectors carry out R&D?

Companies from all sectors and all industries carry out R&D. Often our clients tend to think of R&D being carried out in laboratories with white coats but actually R&D is carried out much more broadly.

Some industries are very reliant on R&D, with specific strategies, management, and departmental responsibility, we might put pharmaceuticals, AI and robotics, software and technology, manufacturing, and engineering in this category. But other sectors like agriculture, construction, and retail also rely on R&D to improve their practices and profitability.

Research and development examples

If you do any of the following then it could indicate R&D activity:

  • Design or make new products
  • Seek to improve or duplicate your processes, services, materials, or devices in a new way
  • Use prototypes
  • Perform testing
  • Develop software or IT solutions
  • Employ staff with a technical or scientific background

Here are some examples of the way we help clients actively identify and maximise value from their R&D.

How to create and promote a culture of R&D in your business

Almost every business has some degree of innovation and identifying where the R&D sits, who is doing it, and what it achieved should be a Board level concern. It’s important to track R&D so that it is recognised and rewarded to create a virtual circle of innovation.

Our three rules to promote a culture of R&D:

  1. Talk about R&D broadly and encourage it
  2. Each business unit reports on their R&D initiatives – don’t define it, let the teams decide
  3. Track and document the costs and benefits of R&D

What is R&D for tax purposes?

GG-Qualifying-Chart

The definition of innovation for R&D for tax purposes is more specific but still broad.

For tax purposes, HMRC states that R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology.

There is a framework given in the Corporate Intangibles Research and Development Manuals (CIRD Manuals) and conditions to be satisfied in the BEIS Guidelines. But it would be wrong to think that this is a tick box exercise with a black and white answer. Often it relies on the ability to present a weight of evidence to support a claim that a project contains qualifying R&D.

To make a robust R&D tax credit claim HMRC will be looking for evidence on how a project:

  • Established there was uncertainty
  • Tried to overcome the uncertainty
  • Show that a professional in the field could not work this out
  • Made an advance in the field, not just for your business.

What is the role of an R&D department

A business may have a department dedicated to R&D and it is the case that often their costs can be identified as qualifying expenditure for R&D tax relief. But that isn’t always where R&D starts and finishes. There may be R&D happening more widely in the business and in other departments. Certainly, there could be indirect costs used to support the R&D department in their work.

How to define an R&D project

Research and development projects are set up to achieve a range of objectives and business needs.

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.

It is important to be clear about the beginning and the end of any R&D activity that forms a project. It sounds obvious but in defining an R&D project there needs to be a clear start date for any R&D and ensure that any costs incurred before that are excluded from the claim. Equally, there needs to be an endpoint, when the uncertainties have been resolved and the project moves into a production phase.

Find out more about the R&D tax relief scheme here

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