How Does Research And Development Relate To Business?

16th Apr 2021
Brought to you by
tax cloud
Share this content

R&D occurs in all businesses, large and small, across every sector. But how R&D relates to each business is completely unique.

R&D: It’s not just for the big multinationals

When you think of research and development, pharmaceutical brands, ground-breaking medicines and big tech companies immediately spring to mind.

But, although R&D lies at the heart of these fields, it’s actually pertinent to every industry in existence.

Innovation is essential if a company is to grow and thrive long term, and it occurs in a range of different ways, opening the door to additional cash via R&D Tax Credits and R&D grants.

R&D is generally considered to have occurred if work has been undertaken to overcome a technical or scientific challenge, not easily solvable by a professional in the field. So yes, certain sectors are R&D-heavy - but all your clients will likely engage with R&D work within their companies at some stage.

How R&D and businesses fit together

When R&D plans are set in motion, a large amount of market research will take place. This in turn leads to the development of new products and services.

Due to cost restraints, small and medium sized enterprises (SME’s) are more likely to enhance an existing product in some way, rather than create something from scratch. Like sustainability, for example: many businesses are looking for new and exciting ways to ‘go green’ by using more eco-friendly materials, ingredients and processes.

Making R&D part of the fabric of a business, and engaging staff so they’re on board with it, is a hugely positive way to ‘do’ research and development successfully. And yes, many companies will be concerned about the costs of innovative work - especially in these economically tricky times.

But with tax reliefs such as R&D Tax Credits and R&D grants available, businesses shouldn’t be put off.

When does R&D occur?

For many companies, research and development happens almost organically, ticking along as an ongoing process. But of course, there aren’t any guarantees with R&D.

Spending money on research and development projects is a risk. The project might not work out as planned, costs may be more than expected, or the project could be abandoned altogether. Besides financial worries, there are also reputational risks to consider.
But if it’s done well - and with a bit of luck - successful R&D can give rise to the company’s next big thing. That’s why it’s so critical.

The two types of R&D: Basic and Applied

Research and development is a catch-all phrase encompassing all activities that increase business knowledge. This could be knowledge around new product creation, streamlining processes or where to make efficiencies. Crucially, R&D is the vehicle by which innovation can take place.

The technological and scientific sectors are commonly associated with R&D, simply because they’re investing in new products, software and solutions all the time. But not all R&D is the same. It can be subdivided into two key types: Basic research and Applied research.

Basic research

Basic R&D is really “R&D for R&D’s sake”. That is to say, it’s general research that’s carried out with the primary aim of expanding a company’s knowledge base. It’s simply about learning more, with no particular end goal in mind.

So for example, an ecommerce firm might carry out research into new innovations around artificial intelligence. The research won’t be used for any practical application, but the knowledge gained will likely be very useful to the business in future.

Applied research

Applied R&D goes a little further in that it’s research which has a particular need or objective behind it. It’s far more focussed than basic R&D which is often quite general.

Businesses undertaking applied research and development will have a specific commercial aim behind it. This could be in marketing a new product line or making day-to-day operations more efficient.

Research and development doesn’t always have to be large scale

Some industries, like pharmaceuticals, manufacturing and construction, are likely to conduct larger, more expensive R&D work. But R&D is not solely the preserve of corporate multinationals - it’s undertaken all the time, by businesses large and small.

Large businesses

Larger businesses of course have larger budgets that make spending out on R&D that much easier. For example, according to Forbes, in 2018 alone Amazon spent an incredible $22.6 entirely on R&D. Perhaps not entirely unexpected, but still incredibly substantial.

Bigger corporate entities also tend to have their own research and development departments, with a vast range of expertise at their fingertips. Many also partner with other businesses and academic institutions.

Small businesses

On the flip side, smaller businesses and start-ups typically don’t have in-house R&D departments, or huge R&D budgets. This makes innovation and growth an entirely different ball game.

Of course, innovation is still vital even to the smallest of firms, especially if they plan to survive long term. Many go down the route of outsourcing their R&D to specialist firms who take on their R&D projects for them.

The inner workings of these arrangements depend on the organisations concerned. Sometimes a company may have innovative plans around new products or services, but lack the equipment and expertise to bring them to life. On other occasions, the company being contracted could be given far more freedom and scope.

Either way outsourcing is a popular option for SMEs, especially those who are looking to take on significant innovation work. It may also help to boost their professional profile.

Don’t forget R&D Tax Credits

R&D Tax Credits are offered by the UK government as a lucrative tax incentive to help companies grow and innovate. Worth as much as 33 pence for every £1 of R&D expenditure, the relief is available to any UK company of any size and in any sector. Whether a company is creating a new product, service or process from scratch, or enhancing an existing one, R&D Tax Credits can offer a substantial financial injection.

Could your client’s benefit?

Find out more on our R&D Tax Credits page, plus discover the benefits of a self-service R&D Tax Credit portal like Tax Cloud.