UHY Hacker Young | Chartered Accountants

Research and development: a ‘key driver of productivity and prosperity’

11 February 2019

Around the world, 2,500 companies spent €736 billion on Research and Development in 2017. R&D is a major driver of productivity and improves the prosperity of billions of people. But it isn’t just the preserve of the corporate giants. SMEs can enhance their success by investing in R&D and can obtain special tax relief to assist with the costs.

The R&D world league table

On 17 December the European Union Science Hub, a department of the European Commission, published its annual Industrial R&D Investment Scoreboard, which collates data on business-funded R&D on the top 2,500 companies in the world. These companies are based in 46 different countries and together represent 90% of worldwide R&D spending or €736 billion. The data relates to the calendar year 2017.

The country with the largest number of the top R&D companies is the USA, with 770. The European Union is second, with 577, and China third with 438. R&D spending in the EU has increased for the eighth successive year, up by 5.5% on 2016. However world-wide investment in R&D has increased by 8.3%. US spending was 9% higher, but China takes the prize, having increased its R&D spending by 20%.

Within the EU, the UK and Germany vie for first place, each with 135 of the top 2,500 companies. However, looking at the total spend on R&D, Germany is third, accounting for 10.9% of worldwide spending, after the USA (37.2%) and Japan (13.6%). The UK’s share of world spending is 3.9%, fifth equal with France and South Korea.

The fields in which we lead – and lag behind

The fields in which R&D spending is invested are not spread evenly across the world. EU companies lead in automotive, aeronautics and pharmaceuticals, but lag behind China and the USA in artificial intelligence and new materials. The EU is also a few steps behind in ‘deep-tech’, which is defined as: ‘the creation of revolutionary solutions that redefine markets and industry processes’. However, the new European Innovation Council is actively addressing this gap.

According to the EU Industrial R&D Investment Scoreboard “In an accelerating global innovation race, in which digital technologies and the physical world are merging, business R&D investments play a fundamental role: they determine the innovation capacity of companies, their competitiveness, and contribute to creating a sustainable, inclusive and prosperous Europe.”

Assistance from HMRC

The benefits of R&D are not restricted to the top 2,500 companies; smaller companies can improve their productivity and their market share by enhancing their products and processes. Here in the UK R&D tax credits are available to businesses of all sizes.  R&D relief allows SMEs to:

  • deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
  • claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss

To qualify for R&D relief the expenditure must be part of a specific project to make an advance in science or technology and must relate to your company’s trade, or one that you intend to start up based on the results of the R&D.

Your project must look for an advance in science and technology and aim to create an advance in the overall field, not just for your business. There must be uncertainty as to its outcome and you will need to show how the uncertainty is to be overcome, and why it cannot be easily worked out by a professional in the field. Although these may seem difficult criteria to meet, it is surprising how much development work by companies is, in fact, eligible for enhanced tax relief and is never recognised as genuine R&D.

R&D tax relief can make a valuable contribution to future-proofing your company. We can advise you on your eligibility for the scheme, and call on specialists in your field as required. Why not give me or your usual UHY contact a call, or complete our contact form?

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