In this article, we will explain what exactly R&D is, what it means for a business, and how it benefits organisations.
What does R&D mean?
R&D is a collective term for innovative projects that aim to develop new products, services, or processes, as well as enhance existing ones. It is linked with 'innovation', and these terms are sometimes interchangeable.
R&D is all about attempting to overcome scientific or technological uncertainty. There may be a problem with no known solution, or a company may wish to develop a product they cannot yet due to technological limitations.
R&D often carries significant risk to a business, as they must spend a lot of money to overcome the uncertainty.
Why do companies carry out R&D?
The ultimate goal of R&D in a business is to improve profitability. For many companies, R&D is essential for maintaining a competitive advantage in their industry. It facilitates better products and processes.
R&D can also help improve internal processes, increasing productivity or reducing waste.
Which industries invest in R&D?
R&D takes place in almost every industry, not just ones perceived as hi-tech. R&D is very important in industries like:
- software & IT
- manufacturing & engineering
You can read a detailed breakdown of R&D examples across industries in our R&D Case Study guide. The guide includes the R&D tax relief these companies were able to claim.
How does R&D benefit the UK?
The benefits of R&D often stretch beyond the companies that conduct it. According to Centreforcities.org, “Business innovation strength is strongly linked to the success of a place”.
Innovative companies have a direct, positive impact on the surrounding area. They attract high-skilled workers, offer higher wages, and strengthen the local economy.
The Royal Society states that:
“R&D benefits people in the UK and around the world by underpinning our industries, creating jobs and applications that improve the quality of our lives and enriching our cultural wellbeing.”
HMRC’s R&D definition
HMRC has a specific definition of R&D for tax purposes. It is important for businesses to know this, as it will impact the company’s eligibility for support.
HMRC defines R&D as a project which:
- relates to a company’s trade, whether current or future;
- attempts to achieve an advance or appreciable improvement in science or technology;
- attempts to overcome technological or scientific uncertainty;
- may not have been easily solved by a competent professional in the field.
The UK government, along with many international governments, encourages companies of all sizes to innovate and invest in R&D. They incentivise these companies through generous tax breaks, known as R&D tax reliefs. In order to claim, your activities must meet HMRC’s definition of R&D.
The UK Government’s R&D goals
The UK government has a target for the total R&D investment of the United Kingdom to be 2.4% of GDP by 2027. They announced in October 2021 that there would be new R&D tax relief reforms taking effect from April 2023.
These reforms aim to tackle scheme abuse and improve compliance. They also plan to expand the qualifying criteria of R&D to include cloud and data services. They will also refocus R&D support towards UK innovation.
How much does R&D cost?
R&D costs can vary, depending on the scope of the R&D itself. If a company pays technical specialists, this will usually not be cheap. The tools and tech they use to carry out the R&D will may also be expensive.
The government offers companies tax reliefs worth around 21.5% of qualifying R&D expenditure to reward the risk taken by investing. Companies can claim these reliefs even if their R&D is not successful. The R&D scheme allows a company to reduce its corporation tax bill or receive a payable cash credit.