Firstly what is R&D?
Research and Development, commonly known as “R&D” has for many years been in existence. A way for the government to fund innovation across a wide range of industries.
It's a term used to describe the activities companies undertake to innovate and introduce new products and services. It's a crucial part of the science and technology industry, where it has a significant influence on the growth of new knowledge and the development of new technologies and products.
Research: This is the systematic investigation into and study of materials, sources, etc., in order to establish facts and reach new conclusions. Research can be basic or applied.
Basic Research: Also known as fundamental or pure research, it's conducted without any immediate commercial objectives and is driven by a scientist's curiosity or interest in a scientific question. The main motivation is to expand human knowledge, not to create or invent something.
Applied Research: This is a form of systematic inquiry involving the practical application of science. It accesses and uses some part of the research communities' (the academia's) accumulated theories, knowledge, methods, and techniques, for a specific or client-driven purpose.
Development: This refers to the process of taking the results of research and turning them into tangible products, processes, or services that can be marketed or used. This part of R&D translates findings from basic research into commercial products or procedures. Development activities involve the design and development of new products, the improvement of existing products, and the scaling up of production processes to introduce a new product or service to the market.
The importance of R&D for economic growth and societal progress cannot be overstated. It fuels innovation in virtually every industry, contributes to economic growth, and plays a role in the development of new sectors and technologies. R&D investment is a key performance indicator for businesses, industries, and economies, and is closely linked to technological advances, competitiveness, and the ability to address societal challenges.
Strategic Shifts & Impact on Innovation
Research and Development (R&D) serves as the beating heart of innovation, with companies of all sizes engaging in this adventurous pursuit to break new ground and shape the future. The journey of R&D, however, isn't just fuelled by creativity and scientific prowess; it's also underpinned by financial incentives such as R&D Tax Credits. These credits act as a vital lifeline, allowing enterprises to recoup some of their investment, making the bold path of innovation a little less daunting financially.
As of April 2023, we stand at a crossroads of change, witnessing some of the most significant adjustments to the R&D tax relief system yet. These shifts in the landscape are not just administrative tweaks; they're strategic moves designed to steer the course of research and the very nature of innovation.
For Small and Medium-sized Enterprises (SMEs), the horizon has altered. Tax relief for the SME R&D tax credits scheme has been dialled down to 86% on qualifying expenditures, a descent from the previous 130%. For those in the throes of loss, the claimable tax credit has shrunk from 14.5% to 10%, with a lifeline thrown only to those companies intensely dedicated to R&D (where R&D costs are at least 40% of total expenses). The message is unmistakable: the government is tightening the reins, reserving the most generous incentives for those most deeply immersed in R&D endeavours.
On the other hand, the Research and Development Expenditure Credit (RDEC) scheme for profitable entities has seen a surge from 13% to a substantial 20%—a golden nod to larger corporations and SMEs collaborating with them. The landscape is equally promising for loss-making companies within the RDEC scheme, who also enjoy the leap to a 20% tax credit.
In relation to the digital era's demands, the scope of what qualifies as R&D expenditure has expanded to embrace the promising field of Artificial Intelligence (AI). Costs associated with machine learning—from creation to maintenance under cloud computing—are now recognised. Yet, as the digital age continues to evolve at a relentless pace, the exclusion of data storage costs raises eyebrows and questions about future amendments.
The arena of AI receives another boost, with the inclusion of datasets for training or testing as a qualifying expenditure. It's a clear acknowledgement of the integral role of data in modern innovation.
New claimants of R&D tax credits, or those returning after a break, face a fresh protocol: a mandatory procedure to HMRC of their intentions to claim, issued within six months of their accounting period's end. This policy change aims to clamp down on retrospective, potentially unsound claims while aiding in the government's financial forecasting.
The plot takes a turn when considering the geographical stage of R&D. The government's initial intent to confine qualifying R&D activities to the UK from April 2023 has been postponed to 2024. This delay gives room to breathe and plan for those who rely on cost-effective overseas developers. The impending policy challenges companies to weigh the merits of lower costs abroad against the benefits of claiming R&D tax credits for UK-based activities.
As we navigate this transformed terrain, the governmental strategy becomes apparent. The focus has sharpened on AI, recognising its vast potential and pivotal role. However, the changes introduce a complex web of decisions for companies pursuing innovation. Some may bask in the enhanced support for AI and large-scale R&D operations, while others navigate the tightening qualifications and ponder the geographic dilemmas ahead.
Ultimately, these adjustments are not just about numbers and percentages; they are shaping the very direction of British innovation. By incentivising certain activities over others, the government isn't just tweaking tax codes—it's sculpting the future of technology and research within the UK, steering the ship towards a horizon that, it hopes, is both pioneering and prosperous.
