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R&D And Innovation: Are They The Same Thing And How Can They Be Funded?

15th Nov 2019
Brought to you by
tax cloud
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It’s essential that companies take on a combination of research and development (R&D) and innovation in order to survive in the marketplace. Understanding how innovation works alongside R&D - and how to fund them both - can make a big, and very positive impact on your client’s bottom line.

Many companies regard R&D and innovation as the same thing - but are they?

In short, no; they’re actually quite different. R&D is often about an early-stage component of innovation - think of it as a catch-all term for commercialising experiments and findings. Furthermore, R&D often concerns longer term strategies and plans, whilst innovation can be set in motion in the near term, right across the business. However, obviously R&D and innovation aren’t entirely mutually exclusive, especially in today’s fast-paced, super-connected marketplace.

It’s a timely question to consider, especially for digital firms who are constantly under intense pressure to showcase the next great technological leap forward. Yet the requirement to continuously innovate plays out across every sector and industry, particularly in pharmaceuticals. The biggest player, Pfizer, has been known for its R&D efforts for decades, although recently the company seems to have opted for shorter term innovation efforts that are less about R&D. So what’s it about?

One school of thought is that the idea of a good product always selling, no matter what, is no longer always true. Today, companies must go beyond simply bringing forth products or technologies in order to obtain success; it’s now all about appearing to “do the right thing” on moral issues, offering outstanding customer service and generally cultivating a wholesome business reputation. Having a good product alone is simply no longer a guarantee of commercial success.

No two companies are the same

Although some companies still treat R&D as non-essential expenditure, research shows that R&D is an important and very necessary expense. Without it, most technical, scientific and pharmaceutical firms in particular would be stopped in their tracks. But the scale and type of R&D varies massively between companies, depending on the types of products they sell and what markets they operate in. How fast and how much R&D needs to occur will also vary.

Consider a comparison between a fluid digital company like Google against a well-loved vastly smaller UK brand like Hovis; it would be bizarre to imagine that Google shouldn’t enhance its current products whilst developing new ones, but Hovis makes bread, biscuits and other products in pretty much the same way it always has done. Google sees innovation far beyond simply a search engine; it has moved into hardware, mobile apps, artificial intelligence, individual software, enterprise services and much more besides. Hovis’ innovations will be much smaller and very different, such as reducing the amount of salt in their bread or cutting fat in their biscuits.

Regardless of whether your client’s R&D is of the fast-paced Google persuasion, or more like that of traditional Hovis, the way that R&D projects are funded is also changing. Where twenty years ago it was harder to obtain the financial capital necessary to fund innovative scientific research, today there are many more financial options and incentives available. This brings us rather nicely into R&D funding.

Funding R&D

R&D is driven by the desire to create bigger, better, more innovative solutions whilst innovation is essentially driven by value. R&D might bring about important or especially interesting findings, but without a process that facilitates the addition of value, R&D can feel superfluous, even though we know it’s essential.

A good way to fund innovation is to stop “cost cutting”, as it looks to investors and customers like the company is going through hard times. Instead, redirect substantial marketing budgets and expenditure on smaller innovation projects that don’t move the needle much, and consider pouring money into larger R&D projects instead. This sends a sign to shareholders that you’re retooling for innovation and growth, not shrinking away from the requirement to move forward.

Another excellent way of unlocking funding is through R&D Tax Credits. Offered by the UK government in the form of either a reduction in a company’s Corporation Tax or as a lump sum payment, the relief is designed to encourage business growth by innovation. The scheme was first launched in the year 2000 and the rates have increased significantly since then. Money saved via the credit can mean thousands of extra pounds in the pockets of UK companies which they can then use to reinvest in the company and grow further. The point is, by investing in R&D projects the net beneficial effect is not just to companies themselves but to the wider UK economy by way of more job opportunities.

R&D Tax Credits are available to companies who are both profit-making and loss-making, so no-one misses out. The rate of relief currently results in a 24.7% benefit on R&D expenditure for SMEs that are turning a profit, and 33.35% is offered to loss-making ones. For larger companies claiming under the RDEC scheme, the relief stands at 12%, resulting in a net benefit after tax of 9.7% - although RDEC claim amounts are generally much larger.

The R&D Tax Credits scheme is open to all UK businesses regardless of sector and there's no minimum claim value. The scope of R&D activities that are eligible - and the costs that be claimed - is purposefully very broad, as long as an element of scientific or technological uncertainty has been addressed. Could one of your client’s benefit?

Get in touch

Find out more about R&D Tax Credits and whether your client might be eligible on the Tax Cloud website. Designed and developed by R&D experts Myriad Associates, there’s a section specifically for accountants which can help you navigate the R&D tax relief claims process. There’s a handy calculator too, so you can see exactly what your client could claim.

We are a team of R&D tax experts, specialists and accountants, ready to assist with any aspect of your client’s R&D Tax Credit claim. Call us today on 0207 118 6045 or use our contact form and we’ll get back to you.