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    What is R&D?

    There are some acronyms that we all just know. But what do they really mean? Let’s go back to basics and take a look at what R&D actually is. Research and development, abbreviated as R&D, is a method for developing new or enhanced innovation that can give a company, industry, or country a strategic advantage.

    For many businesses, R&D is a crucial aspect. It assists companies in:

    • market leadership
    • introducing new products
    • enhancing existing products
    • making a profit

    While the rewards might be substantial, technological innovation can be a stressful and challenging procedure. 

    Who can conduct R&D?

    R&D is typically carried out in a company’s R&D department, although R&D can also be outsourced to a third-party professional, company or an institution.

    Large corporations may perform R&D largely in-house, with a small element of the R&D being outsourced to a third party, potentially in another country to take advantage of their skills and market knowledge

    Entrepreneurs with an innovative product idea would find outsourcing R&D advantageous if it lacks the scientific or technical staff to build and test product prototypes.

    Basic or Applied?

    The majority of research is either basic or applied.

    Basic

    Basic research is all about gaining knowledge and applying it to develop knowledge and awareness that a company may benefit from. This information can be used to inform future R&D projects and strategic business initiatives.

    Applied

    Applied research is much more precise, and it frequently aims to achieve desired outcomes. This could include using the latest technology, expanding into new markets, increasing safety, or lowering prices. The development phase is frequently preceded by applied research.

    Outcomes of R&D

    New product R&D

    R&D and product development are frequently linked. Rapid changes in customer preferences and developing technologies necessitate constant adaptation.

    You must have a thorough awareness of the market and user needs before producing new products. This establishes the foundation for the new product’s development.

    Enhancing existing products and services

    R&D also includes the continuous evaluation of existing products, services, and procedures. If any of these is no longer beneficial or offering value to a market, it runs the danger of stagnating.

    It’s also possible that technology has been developed to provide cost-cutting, efficiency-boosting, or safety-enhancing advancements. This can involve enhancements to the product’s manufacturing and production procedures.

    R&D projects

    Projects for research and development are put up to meet various goals and corporate needs. These could be related to the introduction of a new product or service, the improvement of an existing process, or the implementation of new technology.

    What does R&D mean in terms of taxes?

    For tax reasons, R&D comes into play when “a project tries to create an advancement in science or technology.”

    In terms of your project, you must consider the following guidelines:

    Project

    Work done for a client might be claimed as R&D. A project doesn’t have to be a success to qualify.

    What matters is that you attempted to overcome your fear and there is a level of scientific and technological uncertainty. Only the expenses involved in the R&D project are considered not the project’s conclusion.

    Advance

    An R&D project must improve overall knowledge or skill in a scientific or technological subject.

    Your R&D effort should strive for a genuine breakthrough that hasn’t been seen before. The new or updated product, service, or procedure should represent a breakthrough in its industry.

    Uncertainty

    The uncertainty should need qualified professionals to resolve, implying that the advancement was difficult to obtain.

    Working in a field or having a keen interest in it does not qualify someone as a competent professional. A competent professional’s skills and experience should include:

    • an understanding of the appropriate scientific and technological principles
    • awareness of the present level of knowledge
    • experience and wisdom
    • recognition in the field

    R&D Tax Relief and Credits

    This is a system for rewarding businesses for developing new or improved products, procedures, or services.

    The R&D tax relief and credits regime encourage corporations to invest in scientifically or technologically demanding initiatives by providing financial benefits.

    R&D tax relief or credits, when applied wisely, can generate a virtuous cycle of development. You get your reward and put it toward additional inventions, which leads to more development.

    This includes recruiting and retaining top individuals and increasing efficiency and competitiveness.

    How can you get R&D tax credits?

    R&D tax credit claims are split into two parts – technical and financial considerations.

    Technical

    A corporation must be engaged in technical activities that fit a certain definition of R&D for tax purposes to qualify for R&D tax credits.

    In order to be eligible for R&D tax credits, a project must meet the following requirements:

    • It must strive for a milestone in science or technology.
    • While simultaneously resolving scientific or technological difficulties.

    Projects that contain some form of improvement may be eligible.

    The technical experts in your company are in the best position to comprehend the R&D being done and to help you understand whether the R&D criteria are being met. These people are competent professionals in the field.

    Financial

    Your company must be spending money on qualifying R&D. So, you’ll need to figure out how much it’s costing you to carry out these initiatives.

    Internal staff costs, payments to contractors, consumables, software licencing, water, fuel, and power expenses are all allowable deductions.

    Which R&D tax reliefs or credits are available for your company?

    The R&D tax credits available are mostly determined by whether you are an SME or a large business.

    SME

    Your company has fewer than 500 employees and either gross assets of less than €86 million or less than €100 million in sales. This is calculated on a global basis to include companies under common control or partner with your company. Generally, this means that if your company is part of a larger conglomerate or is linked to other companies, you may need to factor in their employees and finances as well.

    Large

    If your company does not meet the SME criteria you may be eligible for compensation under the large business plan.

    How much can you earn in R&D tax credits?

    R&D tax credit

    This is the refundable tax credit for loss-making SME businesses.

    R&D expenditure credits

    This is the payment credit available to taxpayers under the large company regime.

    R&D tax relief

    This is the additional taxable profit exemption offered to profit-making SME businesses.

    R&D and Accounting

    Unlike taxes, there are no assurances with envisioned R&D outcomes. A company could spend a lot of money looking for a quicker or better way to accomplish something. They may be looking for better treatment than the one they’re now producing and never see a return. R&D doesn’t always generate a benefit. It’s a financial outlay.

    What does R&D mean in terms of business?

    R&D is the initial stage in creating a possible new product or service in the business world.

    Businesses conduct market research and identify client demands and troublesome areas to build innovative and improved products and services to present them to the market effectively.

    R&D is a challenging role to manage in any company, and it is typically fraught with difficulties. Many R&D executives struggle to meet development timelines and better plan and map for the future.

    Building a culture of creativity across a company through R&D is a common goal for many companies, but it is also difficult to attain.

    Why is R&D important for business?

    R&D gives valuable information and expertise, resulting in enhancements to existing processes that increase efficiency while lowering costs. It also enables companies to create new products and services to survive and grow in competitive markets.

    Organisations need to stay competitive and, of course, raise profits, but this typically entails risk owing to the project’s uncertainty.

    Businesses can’t be sure if their aims are realistic or if they’ll be able to attain their goals with what they’re doing.

    Benefits

    • A company that can create and adopt new technologies while also enhancing existing processes has a better chance of long-term success.
    • A sector that invests extensively in R&D will expand and achieve more, including major benefits for consumers.
    • A government’s plans to boost its economy frequently include some type of R&D reward.

    The genuine advantages of R&D may be seen worldwide when innovations are developed that improve the lives of people, especially those who are most in need.

    What does R&D mean in terms of the department?

    From R&D engineers and chemists to R&D managers in charge of the outcomes, an R&D department can include various professions. You may even find R&D leaders that want to lead a company’s R&D department.

    An R&D department’s job is to maintain company competitiveness by giving market information and developing new assistance or enhancing existing ones as needed.

    The R&D department is responsible for a substantial percentage of the company’s future growth.

    The R&D department will be responsible for a variety of tasks. This might include anything from determining the demands of a target market to researching new products to ensuring quality control.

    R&D outsourcing

    R&D outsourcing entails enlisting the assistance of other companies to support or operate your project. These partners can then give you a product or service that you can sell.

    This includes everything from private R&D labs to university research groups to clinical research groups.

    It’s always worthwhile for a company to explore what R&D operations it can bring in-house, as this can be advantageous.

    R&D and innovation

    Innovation frequently refers to novel ideas, goods, services, and techniques. One of the most common ways to innovate is through R&D activities and projects.

    When it comes to R&D, innovation might refer to anything new to your company or something truly distinctive. Although the technology isn’t brand new, the application or product is.

    Procurement of R&D and technology

    The ability to secure the innovation, its timing, risks, and expense are all factors that impact the decision.

    Strategy

    It would be best to strategise to get the most out of an R&D function.

    Whether you want a strategic advantage, a first-mover advantage to capitalise on innovation, keep up with an opponent, or break into a growing product, how you plan and strategise around R&D is significant.

    To take advantage of R&D tax benefits, you may need to change your R&D methods and planning. The ultimate goal of R&D is to pervade a company’s culture and business style.

    Timing

    Outsourcing R&D may be the best way to obtain technology if market growth is modest or low.

    On the other hand, if the market is rapidly expanding and competitors are pouring in, the big opportunity may close before the new entrant’s technology is produced. In this instance, it is preferable to acquire the technology and related expertise in-house before it is too late to enter the market.

    Risks

    There is always the possibility that the anticipated performance specifications will not be fulfilled, that the project timeline will be extended, and that R&D and manufacturing costs will exceed expectations.

    On the other hand, purchasing technology carries a significantly smaller risk because the product, process, or service can be seen and evaluated before the deal is signed.

    Whether the technology is purchased or produced, there is always the risk of it becoming obsolete and being replaced by better technology. Although this risk cannot be eliminated, it can be significantly lowered via rigorous technological forecasting and planning.

    Suppose market development is slow and no clear victor among competing technologies develops. In that case, it may be wiser to watch these technologies through “technology censors” and be ready to step in when the winner arises.

    Costs

    It can be costly to conduct research and development. Many Executives are understandably concerned about the upfront fees that come with no certainty of a return on investment. Nonetheless, it is a necessary function, and R&D investment must be accounted for in budgets.

    R&D costs might be one of the most significant expenses in some businesses.

    As a firm, you must compare the total project cost against the R&D tax credit qualifying costs before deciding if your idea is worthwhile.

    Investment

    R&D investment is an effective approach for a company to remain competitive and meet changing client expectations. Businesses that invest in R&D might obtain a variety of financial advantages, including R&D tax benefits.

    Additional intangible costs are associated with purchasing technology: licence agreements may contain geographical or application restrictions. Other businesses may access the same technology and compete with lower prices or better marketing.

    Selection, Management, and Termination of R&D projects

    Selection

    R&D managers must allocate finite resources such as staff, technology, experimental space, and finances to a diverse range of competing initiatives.

    Because starting an R&D project is both a technical and a business choice, R&D managers should prioritise initiatives based on the following goals:

    • Optimise your long-term payoff
    • Make the best use of your physical assets
    • Control risk while maintaining a well-balanced R&D portfolio
    • Create an environment that encourages creativity and innovation.

    Project selection is typically made yearly, with a list of all active projects and new project proposals, an evaluation and comparison of these projects using numerical and categorical data, and a ranking of the projects.

    Projects above the line get funded, while those below are postponed or deferred indefinitely.

    Some experienced R&D managers do not allocate all of the allocated cash but leave a small percentage on hand to cover any new projects offered during the year after the official laboratory budget has been approved.

    Management

    R&D projects are risky, and having an appropriate budget for technical goals, prices, and duration to perform specific tasks can be challenging. As a result, R&D expenditures should be viewed when provisional at first and then refined as additional data becomes available due to exploratory research and the acquisition of knowledge.

    Many R&D initiatives have historically exceeded their anticipated and planned completion times and budgeted funds, often with fatal results. In R&D, assessing technical progress and goal completion is often more significant than tracking spending over time.

    Termination

    A project should ideally be terminated for one of the following three reasons:

    • There is a change that occurs that makes the new product less appealing to the company, for example, new government requirements, new competing products, or price decreases
    • Unexpected technological challenges arise, and the laboratory lacks the resources to tackle them.
    • The project is severely behind schedule, and no corrective measures are being taken.

    As a result, a capable and intelligent R&D manager should continually review their project portfolio in light of changes in strategic planning, consistently and effectively monitor the progress of each R&D project. They also must not be afraid to terminate projects that have lost their value to the business in terms of cash pay-out and the likelihood of success.

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    DONNA CHALLINOR, CP Innovation Director

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