Create value through innovation

Innovation has generally been recognised as essential for value creation, both for individual companies and for the UK economy as a whole. The development of new ideas, processes and technologies and their flow across different sectors is a significant driver of economic growth and productivity. Recently, innovation has also been identified as crucial to the transition of the economy away from fossil fuels and carbon-intensive business activities.

Many factors affect whether and how businesses innovate, for example, the availability of skills and capital and government policy measures such as tax incentives.

However, none are more important than the company’s own culture, capabilities and internal systems – all of which are aspects of its governance. Unless companies are governed in a way that is conducive to innovation, they are unlikely to be in a position to take advantage of new opportunities.

Our most innovative clients share some key characteristics:

• They invest in activities with uncertain outcomes for which the likely commercial return is difficult to quantify and the risk of failure is higher than normal;
• They benefit from the availability of company-specific skills, which may be highly specialised;
• They have a culture which encourages flexibility, experimentation and a high level of individual decision-making; and
• They require a longer-term time investment horizon than many other kinds of business activity.

Research and Development (R&D) is the process of taking an idea and transforming it into a fully-fledged product or procedure. R&D tax credits are a government incentive designed to encourage innovation across multiple industries. This is an opportunity for you to reduce your corporation tax bill or receive a refund from HMRC based on the number of working hours and relevant costs your business dedicates to Research & Development. Under the scheme, SMEs can claim back up to 33% of the costs associated with R&D.

If you are looking for long-term finance to support innovation, you will need to ensure your management accounts are up to date, you make available detailed lists of debtors and creditors, and you might need up-to-date projections before an expert will consider your application.

If you wish to claim R&D tax credits it can also be helpful to keep on top of your development costs, identifying these on a monthly basis can help to ensure:

• All relevant R&D is captured (likely leading to a bigger claim),
• Early visibility as to the potential R&D credit,
• A much easier process at year end for filing the claim, and
• A good record of evidence in support of the claim should HMRC open an enquiry.

Given the increased levels of scrutiny we are seeing from HMRC in respect of R&D claims, businesses who can put a robust method in place for collating the claim data in real time will be in the best position as we move towards the digitalisation and pre notification of claims.

Whilst R&D tax credits support businesses by providing relief through the early stages of innovation, the UK government are also keen to retain the IP generated through the R&D process in the UK. Patent box was introduced from 2013 and provides relief for patented IP once it has been commercialised.  Eligible companies pay an effective 10% rate of tax on all profits arising from the patented product, providing a significant tax saving of 15% from 1 April 2023.

To be eligible businesses must hold or have an exclusive licence over a GB or EU patent, which it undertook all or most of the R&D for, and be generating income from the patent.

There are similarities in the requirements for R&D and patenting as both require the development of something new and that goes beyond simple modifications. Innovative businesses making R&D claims may therefore benefit from discussing with a patent lawyer whether they have a patentable invention as only one patent is needed to turn the patent box on in relation to all profits arising from sale of the patented invention.

Please talk to us about R&D tax credits, patent box, and long-term finance. Our independent experts have many years of experience and success in advising businesses across a wide range of sectors.