UK’s commitment to research and development brought it to the top 5 ranking of countries in terms of innovation as per the 2019 result of the Global Innovation Index. In fact, the government has already allotted £22 billion in R&D, which is 2.4 per cent of the nation’s wealth, to be granted to innovators in full by 2027.
The country’s reputation has drawn several huge companies to invest in its R&D pursuits, such as Nokia, Pfizer, Ford, and more, and continually pushes forward in this aspect. Britain keeps on encouraging not just businesses but also universities and public services to embark on R&D primarily to attract more global investors.
More funds mean more creativity and a higher chance of success for discoveries. Various industries and sectors in the UK have been taking part in R&D activities, the most common of which are pharmaceuticals, software or technological companies, and semiconductors.
Technological businesses turn to be the topmost innovators resulting in Europe generally naming R&D as RTD, which stands for Research and Technical or Technological Development. R&D fuels industries and companies to remain competitive in the market’s continuous race to the top, and it is even more crucial given the crises the world is currently facing.
Investing more into R&D is made possible through the government’s several forms of incentives, whether it be tax credits or direct financial support. This post will delve more into UK’s R&D endeavors’, most especially concerning businesses, covering what incentives they receive, the pros and cons of investing in R&D, and a tip to reduce income tax on investments dedicated to innovation.
Table of Contents
What Is Research and Development in the UK?
Research and Development (R&D) involves investigative activities that businesses or their outsource creators perform with a main goal of discovery, leading either to completely new products, services, or product lines or simply an innovation of the existing products or services, such as new features.
Though costly in terms of capital, successful R&D discoveries can lead to patents, trademarks, or some forms of breakthrough creations that provide companies with a great advantage in the competitive market and give them a high survival rate despite economic fluctuations.
R&D involves basic research, applied research, and experimental development. In the process of basic research, a deeper understanding is made of a phenomenon or concept; that is, based on the academic standpoint. It is basically the first step toward the actual development of new products, services, or features.
Applied research then aims to use the knowledge gathered, in the form of a novel science or thinking, to come up with new or better ideas. The efforts in this step may lead to a successful determination or development of not just products or services but also operational processes or policies.
The processes may be purely experimental, which can lead to either a breakthrough discovery or failure. But nevertheless, R&D investing companies consistent in their innovative pursuits show to be 13% more productive compared to the businesses that don’t.
There are many ways businesses can execute their R&D pursuits. They can directly employ people to work in their creative department, outsource other firms or buy their ideas, or purchase smaller companies to perform investigative activities on their behalf.
R&D investments are greatly beneficial to the UK’s economy, health, and social well-being. Take, for instance, last 2019 wherein 5.3 million jobs are provided by the creative sectors. This already accounts for 15.7 per cent of all the jobs in the UK. The pharmaceutical industry in itself, committed to R&D, has given jobs to 63,000 people.
Through R&D, Britain was able to contribute to the world regarding the COVID-19 outbreak, particularly via its RECOVERY trial. The drug Dexamethasone was discovered to improve the survival rate of patients who get COVID-19-derived severity of respiratory complications.
Reasons to Invest in R&D
New and better discoveries can give a great edge to firms, even further distancing their gap from other competitors. Having developed products, services, or features that can be difficult to replicate allows them to stay ahead of the competition. Continuous research helps businesses to accurately anticipate customer trends and demands.
Aside from those, the UK government is very supportive of businesses engaging in R&D. Overall, they provide programs that help them access funding, reach other collaborators and researchers, and access potential customers, greatly assisting businesses toward commercial success.
The UK government provides generous support to businesses that embark on R&D. This support may be through UK Research and Innovation (UKRI) or tax incentives (e.g., Patent Box, SME relief, and Research & Development Expenditure Credit or RDEC).
The Internal Service Revenue (IRS) has given tax breaks for companies in the form of corporation tax reliefs, particularly for startup businesses and smaller enterprises with qualifying research expenditures. This tax break can significantly offset the tax obligations of these smaller firms.
Smaller firms or entrepreneurs may also opt to sell their ideas to established businesses and make a large profit in a brief time. This usually happens in Internet companies, although it occurs everywhere when a huge amount of incentive for innovation is involved.
R&D also helps businesses come up with revolutionary advertising and marketing ideas alongside discovering groundbreaking products, services, product lines, or features. Consumers will always seek novelty or better versions. A well-matched advertising and marketing efforts to new versions is a proven way to lure more customers in.
Ultimately, firms committed to R&D have increased market participation, trend-matching prowess, and an inclination toward keeping themselves relevant. All these lead to a good profit as they may discover more efficient products or production means in the process. Profits may not be immediate, but the benefits may be long-lasting.
Risks of Investing in R&D
Investing in R&D may do a lot of good for the firms, especially when they come up with successful discoveries, but it can be really expensive and risky. Businesses tread on novel, untested areas that may or not work.
They may design services or products that would turn out to be commercially unsuccessful or even more costly or difficult to develop than what is expected. Even worse, the new or modified design may not work.
Income Tax Reduced Through R&D Tax Breaks
Risks and failures go hand in hand before businesses truly succeed. At least, the UK government makes sure that firms in the phase of research and development don’t spiral down financially through incentives and tax breaks.
Firms have to make sure they are eligible for tax breaks, so their tax obligations are considerably reduced whilst they focus on growing their business. But claiming tax credits in R&D can get complicated. Tax professionals can significantly help these qualified firms to maximize the benefits they get from embarking on R&D.