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July 23,2019

Innovation in the UK: How can your business win the race for the future?

Paul Duncanson

Innovation has been a hallmark of the UK’s scientific heritage. From the theory of gravity to the Industrial Revolution and the invention of the World Wide Web, British scientists and inventors have led the world in innovative leaps forward, creating new industries and powering economic growth.

However, in the last few years the UK has fallen behind in the levels R&D needed to change the future. The Office for national Statistics (ONS) recent figure of 1.69% expenditure on UK R&D showed that current levels of UK R&D fall below the European average and behind in terms of meeting its own target of 2.4% by 2027. As we approach the fourth industrial revolution and a world where the power of computers is replacing man power, R&D is more important than ever. Innovation lies at the core of everything that is potentially transformative; technology is disrupting industries and changing the way we live.

R&D Tax incentives

For businesses, innovation is proven to unlock latent potential; increasing both efficiency and productivity. This is something recognised by economies like the USA and France who invest far more in R&D and have seen the benefit in economic output per hour. The UK's tax incentive scheme for R&D plays an important part in addressing this issue and higher uptake would enable us to support growing industries of the future, including A.I, robotics and 3D Printing.

R&D tax credits have been developed to boost spending in research and development, creating a pool of resources that can be further invested. The scheme works by reducing a company’s tax bill through relief or credit linked to the company’s qualifying R&D expenditure or profits. The examples below (anonymised for client confidentiality) demonstrate the fruitfulness of R&D to business growth.

  • 10 Developers – £60k per Financial Year – Software business in Glasgow
  • 5 Dentists – 28k per FY – Dentist in Perth
  • 3 Software Engineers – £22k per FY – Start up business in Glasgow

You will notice discrepancies in the ratio of benefit, this is due to the differences in pay and speciality, as R&D is not a linear process so projects are able to qualify at a higher percentage of R&D than others.  This is something we would be able to pin down for you when we get the chance to explore it in more depth.  Furthermore, you can claim 2 years retrospectively of your FYE.

Defining innovation

Analysis from Leyton indicates that many companies, particularly SMEs, could be underclaiming due to a lack of understanding about what work legitimately qualifies. Research and development, as defined by the government, covers a very broad set of activities, including products, processes and computing. This can include both improvements to existing methods or the development of new methods.

Furthermore, an accountant-led process has been shown to realise less benefits in something as specialised and technical as R&D. It is the reason a host of specialist firms were set up to specifically focus on this regime, embedding themselves with businesses to conduct a root and branch assessment of what companies can claim. Many firms have seen this as a better way of realising the benefits of the schemes.

The innovators of tomorrow

In the medium to long term more attention needs to be paid to the innovators of tomorrow. For example, the UK’s underperformance in producing STEM skilled graduates is concerning. This is something Leyton has seen first-hand when talking to businesses in the UK where skill shortages hamper the speed of business growth.

Certainly, the Government could be doing more to promote the scheme, particularly among SMEs, who are the growing lifeblood of the country’s entrepreneurial workforce. It could also send out a signal by making Corporation tax incentives even more attractive, particularly in the current climate of uncertainty. The long-term potential gains significantly outweigh any initial outlay.

Paul Duncanson - Associate
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