Research and Development in your Small Business

Research and development (R&D, sometimes called innovation, research and development or IR&D) is the process of investigating the market need and technical feasibility of a new product and building and refining that product to the point where it is ready for sale.

Large manufacturing companies normally have whole departments, or even one or more sites, dedicated to R&D. In contrast, a small business is more likely to do research as the need arises and may not have even one full-time staff member dedicated to this role.

Budgeting

The amount companies spend on research varies from industry to industry. As you might expect, high-technology companies typically spend a higher proportion of their revenue on R&D than do most other types of business.

General Grants

If your small business needs to invest in R&D, you may be able to apply to the Government or other organisations for money to support this work. Such grants are typically awarded on a like-for-like basis, where you would need to match the value of the grant with funding from other sources.

The Government Grant for Research and Development is available to SMEs based in England, although other parts of the UK have equivalent schemes.

This grant caters for four types of project:

• micro projects (up to £20,000 for projects up to 12 months by companies with fewer than ten employees)
• research projects (up to £100,000 for projects from six to 18 months by companies with fewer than 50 employees)
• development projects (up to £250,000 for projects from six to 36 months by companies with fewer than 250 employees)
• exceptional development projects (up to £500,000 for projects from six to 36 months that can be shown to be of strategic importance to a particular technology or sector of industry)

These grants are administered by the nine Regional Development Agencies, and you should contact your nearest RDA for more details.

Specialised Grants

The Technology Strategy Board provides grants of up to 75 per cent to high-technology companies undertaking collaborative R&D, typically with an academic partner. There has been a significant growth in this type of venture in recent years.

Government investment may also be available through an Enterprise Capital Fund. These funds were set up to provide equity finance to medium and small businesses, and the capital need not be restricted to R&D but could be used to help the growth of the business generally. These investments are managed by Capital for Enterprise Limited on behalf of the Department for Business Enterprise & Regulatory Reform.

Tax Relief

Your may be eligible to claim tax relief if you have spent money on R&D and your business satisfies certain necessary conditions. If you think you may be eligible, you should consult a qualified accountant, who will be able to help you confirm your eligibility and make your claim.

In addition, you may be able to claim capital allowances against equipment bought for R&D purposes.

The Bottom Line

If your small business undertakes a large amount of research, you should consider seeking professional financial advice to determine whether you can save money by applying for government grants or by claiming tax relief. There may even be benefits to restructuring your business so that it is clear which activities are directly related to research, for example by creating a dedicated R&D department if you do not already have one.