How R&D tax credits can offset costs in product development

The art of balancing creativity with financial constraints can be difficult, especially when it comes to product development. But can R&D tax relief ease the risks involved in following more creative paths? We navigate the world of product development, from the impact it has on business growth to the funding opportunities available through R&D tax credits, and how the union of these unlikely partners can propel a business to new heights.

Product development can play a major role in business growth strategies, although between research phases and prototype testing, businesses can experience financial strain. The challenge then, is to find a way to offset short term costs in order to promote long term gains. 

This is where R&D tax credits can provide a helping hand to businesses looking to create cutting edge products. As a form of innovation funding, this government incentive can reduce the cost of research and development phases, allowing businesses in the UK to roll out groundbreaking products without the immense financial pressure. 

But the benefits don’t stop there! 

So today we’re taking a deeper look at the power of product development, and how the combination of R&D tax credits and innovation can expand financial plans and business growth strategies alike.

The Power of Product Development 

Innovation in and of itself is a superpower – especially from a business standpoint. With its ability to form effective solutions to real world problems, innovation can steer a business into the spotlight, allowing them to be recognised for their bold creativity. 

When channeled into product development, innovation takes a new form that can have extensive benefits for businesses, including:

• Distinct market competitiveness
  New products may have the ability to transform consumer lifestyle, meaning those who produce them hold onto a distinctive advantage over competitors
• Meet consumer needs
  Effective product development aims to solve problems that a specific target audience faces, ultimately providing an effective solution
• Improved reputation
  The development of a product that solves consumer problems can improve the overall view of a business, or even propel it into the spotlight (for all the right reasons of course)

By dedicating time and resources to product focused research and development, businesses are able to make a positive impact on their target audience and on their industry. 

How Product Development Improves Business Growth Strategies

By driving innovation, product development has the potential to advance business growth strategies, allowing businesses to establish themselves as leaders in their industries. Here’s how the introduction of new products can shape these strategies: 

• Meet market demands
  Proactive product development allows businesses to stay ahead of market trends, ultimately expanding customer bases
• Creates new revenue streams
  Businesses can diversify their revenue base with new products that may branch across various industries
• Streamlines operations
  Research and development phases often lead to improved operational efficiency and even reduced production costs

What’s more, the product development process enables collaborative partnerships. Not only does this allow businesses to optimise networks and knowledge, but it also provides access to advanced technologies and methods – all of which can improve product quality and efficiency. 

Proving that there’s more to product development than the creation of something new. 

Benefits of R&D Tax Credits for Product Development

As a form of innovation funding, R&D tax credits can provide significant support for innovative businesses. When applied to product development, there are a range of benefits that can impact various areas of the business. 

These benefits may include: 

• Financial savings
• Improved resources
• Reduced risk

Additionally, businesses utilising the R&D tax credit relief are presented with the opportunity to reinvest finances in further innovation, building a cycle of advancement that continues to support business growth strategies. 

Eligibility for R&D Tax Credits

The R&D tax credit relief is a government fund managed by HMRC, so those looking to claim tax credits must ensure that they meet the criteria, and that their projects meet HMRC’s definition of research and development. 

The initial qualifying criteria states that businesses claiming R&D tax credits must be liable to corporation tax in the UK. This means that both SMEs (small and medium sized enterprises) and large businesses can be eligible for the relief. 

HMRC’s definition of research and development is a project that seeks to overcome a scientific or technological uncertainty that could not be otherwise solved by an expert in the field. 

Businesses that meet these requirements can claim up to 33% of eligible costs incurred throughout the course of their research and development projects, including:

• Direct R&D staff costs (including PAYE, NIC and pension contributions)
• Software costs (for software used directly in the project)
• Consumable item costs (such as materials used within the project)
• Subcontracted R&D costs

R&D Tax Credits for Prototype Costs

In addition to the costs mentioned above, businesses working on product development projects that seek to create a new or improved product, can claim R&D tax credits for prototype costs. This can include:

• Design costs
• Construction costs
• Testing costs of test stage prototypes

When claiming prototype costs, businesses must be mindful of HMRC’s criteria for prototypes – that is to say that while the test stage prototype costs are eligible for R&D tax relief, prototypes built with the intention of being sold as the final product, will not qualify for tax credits. 

Guide to R&D Tax Credits for Product Development

With all the information provided, forming a successful R&D tax credit claim can seem complicated. By following these steps however, businesses can ensure that they are well prepared for their claim.

1. Clearly identify qualifying activities and costs
   Qualifying activities directly contribute to the resolution of the scientific or technological uncertainty that the project is looking to overcome, but indirect activities may also be eligible for the relief – costs incurred throughout these activities may be eligible for R&D tax credits
2. Maintain detailed documentation
   A large portion of a successful R&D claim, is the documentation that provides accurate information that supports the claim – this can include financial records, project descriptions and even staff timesheets
3. Work with an R&D tax credit specialist
   Collaborating with a specialist advisor that has a professional understanding of the R&D tax credit policy can ensure that no eligible cost is overlooked, ultimately increasing the benefits of the relief while reducing the risks that may be associated with tax credits
4. Compile a technical report
   As one of the most important parts of an R&D tax credit claim, a technical report should clearly outline the scientific or technological advancement that the project made, providing real examples of technical uncertainties that were faced – some R&D specialists will collaborate with a business in order to build a solid technical report
5. Review the claim
   When it comes to an R&D claim, accuracy is crucial, so reviewing the entire claim prior to submission is highly important, as it can ensure that all figures and information is correct

It’s important to note that HMRC may request additional information about a research and development project, especially if the project is complex. For this reason, businesses must be prepared to:

• Provide additional documentation upon request
• Answer questions regarding the technical aspects of the project
• Demonstrate how the project aligns with the criteria
• Justify the costs associated with the claim

How Alexander Clifford Can Help

As one of the UK’s leading R&D tax credit advisories, the specialist team at Alexander Clifford has an immense grasp on HMRC policy, which when combined with their passion for innovative advancement, provides businesses with unwavering support throughout the claims process. 

Using their meticulous attention to detail, our specialists are able to identify key qualifying activities and costs that often go overlooked, while their collaborative prowess helps them to produce well rounded technical reports that highlight the most important aspects of an R&D claim.

Using these skills, our specialists have submitted over 2,400 successful claims, awarding our clients with more than £83 million in relief. 

That’s what makes Alexander Clifford your trusted choice for R&D tax credits.  Has your business been engaging in a qualifying research and development project? Get a head start on your R&D tax credit claim with our specialist team, by filling in the form below or book an appointment at a time that suits you.