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How do you fund your innovation?

Most business owners would agree that innovation is critical to the growth and survival of their businesses. In a survey of over 500 companies by Accenture, more than 90% of the executives surveyed said that the long-term success of their organisation depends on their ability to develop new ideas, products and services.

In their Community Innovation Survey, the EU found that 49% of all enterprises in the EU reported they were innovation active. Interestingly, almost half (48.2 %) of innovative enterprises in the EU introduced innovations from which there were environmental benefits within the enterprise and almost one third (30.3 %) of innovative enterprises introduced innovations from which environmental benefits were related to their consumption or use.

According to the Department for Business, Energy & Industrial Strategy (BEIS), 50% of businesses are innovation active, with large firms being more active than SMEs. So, the majority of companies are doing it! However, for both Large and SME businesses “cost factors” were the highest rated constraint on innovation; specifically “availability of finance” was cited as a key issue. At the recent Advanced Engineering show at the NEC in Birmingham we asked companies for their views on the subject. We wanted to know what funding meant to them, what their most important sources were and how additional sources would help.

So, at best, the opportunities and choices for those searching for sources of investment are not clear. Given that, it’s not surprising that many businesses ignore two major opportunity areas to support their investment in innovation without the need for loans, external investment or grants. Here’s some data which highlights the scale of the missed opportunity.

The Department for Business, Energy and Industrial Strategy have identified around 133,000 businesses in the UK are innovation active. In the same 2017 period around 25,000 companies recouped up to 33% of the investment they made in R&D through the HMRC R&D Tax Credits scheme. Last year this tax relief was worth more than £3.5 billion, but only 19% of innovating companies in the UK claimed this support.

So, in terms of opportunity missed, this clearly shows that 81% of innovation active businesses did not take advantage of a scheme designed specifically to help them with funding.

In the same period only around 1,000 companies claimed support for their investment in innovation using HMRC’s Patent Box scheme. This enables UK companies to pay a reduced Corporation Tax rate of 10% on earnings resulting from the sales of products or services containing a qualifying patented innovation.

Many patented inventions are often small technical improvements on existing products or processes, which can yield substantial returns as revenues on worldwide sales are eligible. HMRC reported that £942 million has been claimed through Patent Box relief in 2016/17. To share in the benefits of the scheme the key criteria are simple; a UK or EU patent and to be liable for Corporation Tax.

Most businesses think of patents only as a way of protecting their intellectual property. Barriers to take up of patents range from believing that they are expensive, that they take a long time to acquire and that competitors use patents to steal ideas and solution. This goes some way to explain why, according to the European Commission Innovation Survey, only 17% of EU companies using a patent to protect their most valuable innovation.

Perhaps if business thought about patents as a way of recouping their investment or rewarding their drive for growth this picture may change. In reality, patents can be simple to draft, cost around £5,000 and be granted in 9 months. Expert advice and help are the key.

The activity and expenditure involved in creating an innovative product which would qualify for R&D tax credits may well be identical to that contributing to calculating a Patent Box claim. Only 3% of companies with eligible patents who are claiming R&D tax credits are taking advantage of this benefit.

The government wants to reward those companies who are investing in growing their businesses and UK Plc. They’ve made a large source of funding available.

To get further advice and specialist help today from business advisors with a track record of success for their clients, please contact us.