In the past, some may have seen Research and Development (R&D) as an unavoidable cost of doing business, which can be reduced by claiming R&D tax credits. The COVID-19 pandemic has forced many businesses to change how they think about innovation as well as the way they operate. It has highlighted that in a ‘knowledge economy’, the ability to innovate and the benefits that it brings are core to the value and survival of business.
Despite the value of innovation and the intellectual property it creates, relatively few companies have a strategy for innovation that is aligned with their business goals.
Why aligning innovation and business strategies matters
It is key that you understand how your R&D and innovation can help your business, and how you are going to fund that R&D. For example, if your aim is to be able to create bespoke products for your customers, you may be happy for them to fund that innovation and own any IP necessary.
However, for the vast majority of businesses building a competitive advantage relies on your R&D creating value for your business in the long term. When your R&D leads to lasting IP, how you hold and use that IP should be determined by and align to your key business goals.
For example, a manufacturing business with different product lines might want to capitalise the R&D costs related to each product and the related IP within a specific subsidiary. This creates value in that subsidiary and makes it saleable as whole. This sort of vertical integration makes sense if you are building product streams to an exit.
On the other hand, larger businesses that are aiming for long term growth and looking to benefit from patent income via the patent box scheme, might want to hold IP at the highest level in the group or ring-fence it in a specific licencing company to maximise the long term tax advantages.
You may also need to choose the jurisdiction in which R&D is carried out and any resulting IP is held. Countries compete to be favoured locations for R&D by offering different levels of R&D and Patent Box tax reliefs. Choosing the right jurisdiction will affect the post-tax costs of your R&D. You will also need to manage transfer pricing and other tax considerations.
These important decision are in effect your innovation strategy, even if it isn’t formally documented. Making the right decisions will ensure your R&D and any innovations effectively contribute to your business success. Get your strategy wrong and you go back to R&D being simply a cost of doing business.
Developing an innovation strategy: your first steps
So how do you develop the right innovation strategy for your business? No matter what your business goals are, building an effective and efficient innovation strategy will involve working through these key steps:
Identify how innovation can help towards your business goals
Identify your key R&D projects
Work out the after-tax costs of both those projects and the products/services they will allow you to create – so you can choose the most efficient options
Identify where you want the resulting value to be retained in the business.
Clearly, each of these step can be complicated, but even working through the thought process will help you avoid mistakes and the cost of correcting them.
BDO can advise you on devising, implementing and managing the right innovation strategy for your business. To discuss your innovation and R&D plans, please get in touch here