Research and development, often abbreviated to ‘R&D’, is a business activity that focuses on risk-taking, problem-solving and innovation. It can be conducted by any business of all sizes and across a range of sectors including pharmaceutical, automotive, and manufacturing.
It encompasses a range of activities that can enable the launch of new products, services, processes and materials, or the improvement of existing ones. This development does not have to finish with a marketable product. Instead, R&D can focus on trying to solve a challenging issue and simply trying to resolve this problem can count as R&D.
To support businesses carrying out R&D and encourage UK innovation, the government launched the research and development tax relief incentives. With these generous credits, UK businesses can access a cash boost for taking a financial risk when investing in innovative projects.
Read on to learn what R&D involves for modern businesses, why it’s essential, and how the government rewards companies like yours for innovating.
What does R&D involve?
R&D involves spending time, money, and resources on problem-solving, investigation and testing to build valuable knowledge, find new ways of doing things or develop new or existing products or services. You don’t have to be developing something entirely new, or even reinventing the wheel: what matters is that you encountered ‘scientific or technological uncertainty’. Work carried out for clients is eligible. And your projects needn’t have been ultimately successful either.
Many businesses have R&D strategies, and their processes will inevitably differ from one company to the next. Generally, an R&D team is made up of professionals from different backgrounds such as engineers, who work together towards a common goal where the achievement of specific technical aims (as well as how they might be achieved in practice) comes with some uncertainty.
Why is R&D important?
The overarching aim of R&D is to help businesses to solve an issue within their industry, and as a side effect, to help a business remain competitive.
Although many may believe that R&D is limited to enormous investments in world-leading companies, it’s not. Companies of all sizes and across all sectors can make a claim – the guidelines apply to companies of all types and sizes across the UK.
According to the latest ONS data, R&D expenditure among UK businesses grew 3.5% to reach £26.9bn in 2020. R&D-specific employment also rose 6.8% from 2019, with the equivalent of 283,000 full-time positions filled.
Research & Development tax credits
R&D is as valuable to the wider economy as it is to individual companies, which is why the UK government incentivises business innovation.
One of the most significant incentives comes from the incentive. Through this, UK businesses of all sizes and sectors can access tax credits, in the form of direct cash payments or corporate tax reductions.
In order to qualify for R&D tax credits, a business must be able to demonstrate that its efforts towards an improvement or development are also towards an advance in its field as a whole. It’s important to add that, particularly in cautious sectors with NDAs, R&D tax relief credits can be paid out to a business for creating a product/service/material/process which has already been created by a competitor but is not public knowledge as they are still investing and taking a financial risk in their R&D.
For the purpose of this scheme, the government provides the following definition of R&D:
“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.”
The criteria for claiming R&D tax credits are purposely broad to encourage innovation across all sectors and the relief on offer is different for small-and-medium-sized enterprises (SMEs) and large businesses.
SMEs can claim as much as 33p for every £1 of qualifying R&D expenditure, while large businesses can claim up to 11p per £1. These rewards can then be reinvested to boost growth, access new resources or fuel further innovation.