Research and development
First published 13 July 2018 • Updated 24 May 2019
For many successful small businesses, a key part of their advantage comes from their research and development (R&D). There are as many kinds of R&D as there are types of business.
What is research and development?
R&D is a broad term to describe the ways in which businesses spend resources and make investments to innovate and increase revenue. Whether your aim is to develop new strategies, create a new prototype or enhance an existing product, R&D is a key part of the process.
There are three main types of R&D:
- basic research, where you build on existing knowledge in the current market
- applied research, where you carry out targeted research, such as addressing a gap in the market and understanding its requirements
- development, where you use research to develop prototypes and/or processes to be tried and tested, before they are engineered or manufactured for commercial use.
Is R&D right for my business?
R&D is by nature an ongoing process, rather than a quick fix. Some businesses carry on a perpetual R&D process to keep their products evolving (think of Apple). If you think your business has a need for R&D, you need to weigh up the potential benefits against the time, money and effort it will cost, along with the risks (e.g. you may not have anything to show for it). The alternative to R&D is to obtain and use market research that already exists. This could save you time and involves less risk, but it’ll cost you more with license fees and royalties.
Small businesses in sectors such as consumer goods, software, advanced technologies and pharmaceuticals all need a significant investment in R&D due to their competitive and constantly developing markets. Companies from many other sectors may also have to invest in R&D, but this may not form such a high percentage of their overall spend.
It may not be clear to you yet how much R&D your small business needs. If you are breaking new ground, you may be able to patent your research or issue non-disclosure agreements. This will place you ahead of your competitors and increase the value of your research, and in the long run could provide a return on investment. However, if your research is not patented, then competing businesses can, quite frankly, steal your ideas for free.
Ultimately it is your decision whether or not to invest in R&D. Remember that timing is key: ensure you have a chance to carry out effective R&D before you’re pipped to the post, rendering the whole process redundant. For this reason, it pays to think a long way ahead (which is why it’s so important to have a good business plan).
What are the benefits of R&D?
Advantages of R&D range from safeguarding your business’s long-term future to standing out in a crowded market, keeping up with competitors or simply increasing revenue. One of the most popular goals is to achieve some kind of unique selling point (USP) that is hard for others to replicate. If this is your aim, remember to seek legal advice for intellectual property protection. Similarly, you may have a long-term goal in your business plan but not yet the means to achieve it; R&D can help you discover ways to get there.
Another benefit of R&D for small businesses is that it can give you the chance to collaborate with a wide range of organisations and educational institutes, which in turn will help build the reputation of your business within the market. Last but not least, it can attract investors for things like business partnerships, or help you gain funding such as innovation, research and development grants from the public sector. R&D tax credits are also available from the government.
R&D tax credits and how you could benefit
The government provides tax relief to businesses that carry out R&D in the science and technology sectors, for projects to develop new products or services, or to enhance an existing offering. Small businesses involved in innovative projects in science and technology can even claim tax credits on projects that are unsuccessful – which is a big incentive to have a go.
SME R&D relief is available to businesses with fewer than 500 employees and a turnover of under €100m (or a balance sheet total of €86m). Tax relief allows you to deduct an additional 130% of qualifying costs from yearly profits, on top of the usual 100% deduction (making a total 230% deduction to set against profits). You can also claim a tax credit if your company is making a loss, worth up to 14.5% of the surrenderable loss.
To receive the government’s R&D relief, you need to show that your project was looking to make an advancement in the overall field of science and technology, not just to benefit your business. You also have to show that there was ‘uncertainty’ in your project, meaning you were breaking new ground and discovering something that was previously unfeasible. Furthermore, you need to prove that you carried out research, testing and analysis to ‘overcome the uncertainty’, where you overcame challenges. Finally, you need to show that no other professionals in your field could have easily discovered your innovation, and that they struggled to find solutions.
Other R&D schemes to help you
In addition to tax credits there are other ways to receive investment, contracts, grants and help from other organisations backed by the government. Catapult Centres help SMEs to develop innovative technologies and turn ideas into products, while the Design Council is on hand to support new concepts. Currently, if you are looking at a particularly ambitious project, you could also apply for a loan from the European Investment Bank.
The government also has an extensive list of funding opportunities through Innovate UK, with funding ranging anywhere between £25,000 and £10 million. Ask your accountant about the funding opportunities for supporting your R&D.
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