Euan Pallister: Well, hello, and a very warm welcome to this next event hosted by Innovolo. My name is Euan Pallister. I’m one of the directors here at Innovolo, and I have the privilege today to introduce to you firstly, Karen Macfadden. Karen is an Associate Director at the Catax Group. And we offer her a warm welcome and are really looking forward to the expertise and the experience that she will be bringing to this event for your benefit. Secondly, I’ll introduce my colleague, Bradley Pallister, who is also a director here at Innovolo who will be discussing some of the common innovation misconceptions out there today, and where the benefit lies in really turning these ideas on their heads. While this event is not exactly for the purpose of discussing Catax and Innovolo, I think it’d be beneficial to explain very briefly who we are. Karen will be introducing Catax Group to us in a few minutes.
So, while I have your attention, I’ll briefly tell you who Innovolo is. Innovolo are essentially outsourced, physical product developers. Companies like yourselves with internal R&D teams are reaching out as competition and other drivers demand faster and more productive new product development with less risk. Most companies that do not have their own R&D department struggle to know where to start often relying on their suppliers for innovation as do their competition. And they don’t have the resources to invest internally, by using a company such as Innovolo they can invest as much or as little as they wish into their R&D budget knowing their ideas have been prioritized according to their business strategy and market positioning, offering the new product the best chance of a resounding success.
So, the subject of this event is innovation, misconceptions, and how you can make serious money from R&D. It is absolutely crucial, if you’re not to waste investment, to first understand these misconceptions. And secondly, to take advantage of what Karen is going to share with us. Where should we start then, Bradley?
Bradley Pallister: Well, thanks, Euan, and a very warm afternoon to everyone on the call today. So, just wanted to go through these common misconceptions about innovation.
Misconception #1 – Innovation is all about ideas.
And I wanted to just kick off this first one, which is all about innovation is all about ideas. So, I just wanted to start with a quote from Napoleon Hill. I guess everyone knows who Napoleon Hill is. Anyway, he said once that ideas are the beginning points of all fortunes. And that’s exactly right. Ideas are indeed only the beginning. And we find that targets for innovation programs are all around ideas, creating ideas, training, tweaking, and refining those ideas.
And we spoke a bit about this in our last webinar about generating those ideas and prioritizing them and picking out the ones that really matter to your ROI. But, in our experience, the tricky bit, and this is where in my personal opinion is where the targets should be set, is around actually turning those ideas into something real and something tangible.
We’re talking about execution. Executing your ideas is such a critical part of this whole thing. Creating something real and tangible means bringing that idea to fruition, giving enough of the right resources, giving enough of the right attention to getting it out there so you can effectively compete with the existing players and competitors in your marketplace. Obviously, this is all kind of focused on product development, but you get the drift. Having an external idea execution mentor, if you can put it that way, is one way of making sure that your ideas bear fruit and bring money.
Euan: So, ideas are worth nothing without focus. Focus is the ability to concentrate all your limited resources on whatever is critical at that moment. Without that focus, you can’t accomplish anything of value. While, if you focus effectively, you’ll be able to compensate for an erratic talent or even a shortage of it. Fortunately, the skill of focus can be acquired and sharpened through training.
Bradley: Ideas are worth nothing without discipline. Discipline is so key to this whole thing. And the most successful people in life are disciplined. The same holds true for the realization of your ideas.
In the poem, “The Road Less Travelled” Scott Peck says, without discipline we can solve nothing. So, on your idea execution journey, if you like, you can expect frustration to creep in. Disciplined people grow the most when they’re challenged by optimal levels of frustration. Frustrated people grow. When disciplined people are challenged or frustrated, their problem-solving skills, are called to the fore, and they stay open and committed. They’re willing to be flexible in their approach until they develop the wisdom necessary to succeed. These uncertain times that we live in challenge disciplined people on all levels and end up determining the strength of their character. So, you need to work harder, and you need to work smarter. To turn disciplined people that not satisfied living an average life because they know that if you want to succeed, you have to be willing to work harder than anyone else. In starting down this path of discipline, it’s good practice to get yourself a mentor or a wingman, as we had in one of our past webinars.
So, you’ve got to be patient, good things come to those that wait. This doesn’t mean waiting and doing nothing until things manifest themselves. It means working hard while you wait and trusting that what is meant to be yours will come your way. So, disciplined people are willing, willing to listen, to learn, to work, to wait, to seek guidance. They’re willing to change their minds and be flexible, to change their ways, to give their time, their energy, and their commitment to the process. And because of this, disciplined people can quickly pivot wherever necessary to meet the challenge of the day and underwrite their success. They take responsibility for their end of a failure or misunderstanding. If something doesn’t work out, they analyze it, what and where things went off track, and take measures to improve things going forward. Trusted, and solid relationships are the order of the day here.
Euan: And ideas are really worth nothing without execution. We have experienced our fair share of successes and flops, understanding what it takes to turn an idea from a scrapbook scribble to a revenue-making organization or initiative. There’s such a difference between a good idea and a great business. We see far too many people throw their money down the drain, plowing big figures into fast-track marketing, and not into proving the value of their product or service. Maybe more money is frittered away on dead-ended ideas than maybe we care to admit.
A particularly poignant quote of the late CEO of Apple was, “To me, ideas are worth nothing unless executed properly. They are just a multiplier. Execution is worth millions.”
“To me, ideas are worth nothing unless executed properly. They are just a multiplier. Execution is worth millions.”
Misconception #2 – Epiphany.
Bradley: So, just want to say a little bit about the misconception of epiphany or flashes of insight. We all know about Isaac Newton and the falling Apple, all that type of thing. And those flashes of insight feel great, don’t they? But, the way they’re reported distorts the well-documented history of how creativity and success happens. Epiphanies are a consequence of effort, not just the inspiration for it. And no idea is completely original. All ideas are made from other ideas. They’re compounded.
So, when you hear a story of a flash of insight, just a quick check on that is, you know how much time did that person spend working on that idea before the kind of epiphany happened? How many ideas from other people did they reuse and kind of revise? How much work did they do before it happened? So, the point about epiphany here is, and the point that I’m raising is an epiphany or a flash of insight doesn’t find you investors. It won’t make you a prototype. It won’t sacrifice free time or persist in the face of rejection. Only you can do that. And you’ll have to do it without a guarantee of success.
Misconception #3 – We know history.
Euan: So, we know the history. This is one of the misconceptions. We romanticize the past to fit the present, creating or making traps for creatives who don’t know the true history of their own field. I’ll give you two examples.
- Thomas Edison did not invent the light bulb. He is often credited with creating the solution in 1879, the carbon filament light bulb, yet the British chemist, Warren de la Rue, had solved the scientific challenges nearly 40 years earlier.
- Ford did not invent the automobile nor the assembly line, although he sure is famous for it. In fact, when Ford’s manufacturing chief, Sorenson, showed the crude assembly to Henry, he was skeptical but encouraging. It took five years before the assembly line concept was actually realized. Cutting the Model T assembly from 12 and a half hours down to one and a half hours.
The inspiring lies are often more popular than complex truths. And history is heavily tainted with survivorship bias, which distracts us away from the more useful, historic lessons. History is not a straight line of progress. It wasn’t clear that B would fall A until after it happened. This means that the present isn’t a straight line of progress either, i.e. jetpacks or flying cars are not flukes. Historically, we’re wrong far more often than we think.
Misconception #4 – Humans love new ideas.
Bradley: So, the question here is, as humans do we love new ideas or not? Well, actually, generally, we humans, (I’m assuming that everyone’s on the call here are humans), we humans are a conservative kind of species, and conformity is deep in our biology. While talking about creativity is very popular, actually being creative puts your social status at risk, you put your neck in the line. All great ideas were rejected often for years or decades, yet we kind of bury this in our own history. The history of breakthroughs is a tale of persistence versus rejection. Much of what makes a successful innovator is their ability to persuade and to convince conservative people of the merits of their ideas and inventions, which is a very different skill from creativity itself. Your problem is not likely just your ideas, but your skills for pitching those ideas to others. Ideas are rarely rejected just on their merits. They’re rejected because of how they make people feel. So, the bigger the idea, the more hairy and scary that idea, the harder the persuasion challenge.
Misconception #5 – The Lone Inventor.
Euan: So, it brings us all to the next misconception, the lone inventor. It’s easier to respect and follow a hero if they are portrayed as superhuman, but even people worthy of the title genius or prodigies like Mozart or Picasso or Einstein had family and teachers who taught them. Many of Edison’s patents are shared with coworkers, yet despite his huge ego, he knew that collaboration was actually critical to his success.
Stories of mad geniuses who worked completely alone are extremely rare. Pick any master who you think worked alone, and read some of their histories, you’ll be surprised how many people actually influenced their work. Learning to collaborate and give and receive feedback may matter far more than your individual brilliance.
This brings us on to another topic: does real innovation happen bottom-up or top-down? Who drives the innovation in your company? This is a tricky one. The majority of good ideas come from the people actually come from the people. I think it’s the expression we used before, but they come from the people that are in the trenches turning the wrenches. However, an innovation initiative of any reasonable scale requires a formal, intentional resource commitment. This is one that needs focus and resources from top executives to sustain or even initiate relevant efforts. While ideation is everyone’s job, as are small improvements in each staff members’ direct sphere of responsibility, most team members don’t have the capacity, capability, or interest outside of their existing business as usual job, as well as addressing major innovations.
Misconception #6 – Good ideas are rare.
Bradley: So, we’ve got a quick poll up in front of us here. One quick question. Are good ideas rare? Yes or no? And we can see that you’re kindly starting to add your vote. I’ll just wait for that to finish. So, it’s looking, it’s looking… We’ll just end the polling there now.
Okay, so it looks like no, good ideas are not rare. 68% of attendees said they’re not rare.
Well, that’s interesting, very interesting because if you watch any six-year-old, for, say, an hour or so and you give them a load of LEGO or Play-Doh or whatever, they’ll be inventing dozens of things, their mind’s active, with their hands and their minds, they’re inventing, you know, humans are built for creativity. The problem is the conventions of adult life could demand a kind of conformity, and we sacrifice our creative instinct in favor of our social status. Unlike a child, adults are supremely and instantly judgmental. They kill ideas before they’ve even had a moment to prove their worth. But it’s easy to rediscover that creativity you had when you’re a six-year-old, but remember, we’re already creative. The challenge is the ideas don’t often come with the courage that is needed to invest in them. Good ideas are everywhere. What’s uncommon is that people with the conviction to put their reputation behind those ideas.
Misconception #7 – your boss knows more than you.
Euan: That brings us on to the next misconception that your boss, or the boss, knows more than anyone else. This is one we’re going to be covering in a new webinar very shortly. So, look out for that one. But a misconception in the workplace is that senior staff are better at everything than the people who work for them. This is false in so many ways, but creative intuition might be the falsest. To rise in power demands good political judgment, yet innovation requires a willingness to defy convention. So, convention-defiers, if that is such a word, are harder to promote in most organizations yet absolutely essential for progress. To make the assumption that senior staff are the best at leading change is a huge mistake.
Misconception #8 – A great leader never fails at innovation.
Bradley: Yeah, so this brings us very nicely on to a great leader never fails at innovation. Really? Well, if we think about it the inherent conflicts that exist between innovation and business as usual, they’re just simply too fundamental and too powerful for the boss to tackle alone. Innovation should not be isolated from business as usual, there must be engagement between those two, the innovation and business as usual.
Nearly every worthwhile innovation initiative needs to leverage both existing assets and capabilities, and also draw in the external, naïve experts. Over the years more and more companies have created internal innovation incubators and accelerators, and often come across as something that the company is doing to show that they value their employees, and they listen to their ideas. In reality, it’s almost become a bit of a checkbox exercise. But, listening to employees’ ideas is something that every company should do without exception and one from which they’ll undoubtedly benefit. But the culture itself shouldn’t need an innovation program for people to feel that way. If it’s not done for the right reasons, it comes across as though the company is doing an innovation program to kind of feel better about itself, which is a complete waste of time and money. So, the point here is don’t limit innovation to the kind of skunkworks or the CEO’s ivory towers, you can’t do this journey on your own. You need your team, and you need your external Naïve Experts.
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Misconception #9 – The best ideas win.
Euan: So, we have the best ideas win. We celebrate the winners and history blames losers for their fate even if they did the most, even if they did most of the same things that the winners did. Marketing, politics, and timing have a tremendous influence on why one idea or its competitor wins. Yet these details are more complex than we want to hear, and they fade from history. It’s satisfying to believe that the best idea has won in the past because it’s somebody you want to believe about the present, too.
But to be successful with ideas demands studying why some lousy ideas have triumphed i.e., why doesn’t the US use the metric system, for instance? And some great ones are still very much on the sidelines. The world of ideas is not a pure meritocracy, and you need to act accordingly. Best practices for generating ideas have very little if anything to do with the best practices for their execution. Innovation must be closely and carefully managed. Remember that 99% of the innovation journey is actually in the execution. Creativity and the constant generation of ideas without execution are quite frankly, irresponsible.
Misconception #10 – Problems are less interesting than solutions.
Bradley: Yeah, and what we need to think about, Euan, is you know how much effort we put into the problem versus the solution. Einstein said if he had 20 days, “If I had 20 days to solve a problem, I’ll take 19 days to define it.” So, there are many, many creative ways to think about the problem and different ways to look at a situation.
The impatient people run at full speed into solving things, speeding right past the insights needed to find a truly great solution. If you listen to how successful creators talk about their daily work, they spend more time thinking about the problem than the kind of epiphany obsessed media would have us believe.
“If I had 20 days to solve a problem, I’ll take 19 days to define it.”
Misconception #11 – Innovation is always good.
Euan: So, this is this misconception, innovation is always good, is an interesting one. Is innovation good? How would you feel about… I’d like to put this question out there. How would you feel about an invention that actually ends your profession? In a very it’s a very negative slant on it, but what impact will your idea have 1 or 5 or 10 or 100 years from now? All innovations out are changing, all change helps some people and hurts others. Many horrible inventions were created with the best intentions. And some horrible intentions actually led to some good consequences. I’ll give you an example. A couple of examples of Benz and Ford, for instance, they never imagined that automobiles vehicles would, would kill 1.35 million people just in the year 2016. That’s a shocking fact. But what would we do without vehicles? So, it’s a very interesting, interesting thing to look at.
The Wright brothers, another example, they never, never imagined predator drones, for instance. Any successful idea has a multitude of consequences that are impossible to predict and very difficult to even measure. The other side to this point is this: the first principle of initiating any innovation program is to do no harm to existing operations. Unless you’ve lost your business overnight in a COVID situation, which we’d be very sympathetic about, for example, in which case you would need to pivot rather than innovate. So, that was the 11 main misconceptions of innovation. Have you got anything else to add at this point, Bradley?
Bradley: No, no, I think that’s… I think that was good. And the slide here just really shows the reason that you’d be pretty silly not to invest in innovation right now. This is the Virtuous Circle of Innovation. And it just shows the incredible support that the UK Government is putting into making your business a success. I think Karen will be showing us a bit more on the R&D tax side of things now.
Karen Macfadden: Yeah, absolutely. Thanks for that, guys, it was really insightful. I’ve listened to a number of your webinars, so I really enjoy the new content that you bring out. Yeah, just on that last slide, I’ll share my screen now with a presentation that I have regarding R&D tax relief.
So, hi, everyone. I’m one of the partners with the Catax Group and I’ll talk to you about this tax break that HMRC has available. I’ll really be talking about what exactly is it? Is it worth doing? And can you claim? So, in my line of work a lot of people just simply ask me what exactly R&D tax relief, research and development tax relief is: It’s a government initiative, and it’s designed to reward limited companies in the UK only, apologies if it is anyone overseas watching this hoping they can claim. But, yes, it’s for the UK only registered companies.
And the idea is you do R&D, you claim the tax relief, and it will either be a reduction in your tax bill or cash injection here. And HMRC sort of imagine you reinvest that money into the business, you keep being innovative, and then you keep making a profit, and from that profit, you make corporation tax, a corporate–
Euan: Karen, sorry, can I just quickly interrupt? Sorry. I don’t think we can see your presentation at the moment.
Karen: All right. Okay.
Karen: No, thank you for interrupting. Okay, just give me a heads up if it’s happening now.
Euan: Yeah, that’s working now.
Karen: Okay, no worries. I’ll just start with slide two this way. Technology, guys! Perfect.
So, ultimately, I was just explaining that the reason that this exists it’s not too good to be true. It’s there for a reason. And if you do qualify for it, then absolutely go ahead, and claim it. Is it worth doing? Absolutely. When you do R&D, the purpose of it is to push boundaries in your sector. It’s to advance yourself in your field.
It’s something that I’ve always picked up from working with clients is if you’re going to do R&D and you’re a bit cautious about it or you’re not too sure how to push your data forward, do it smart because you could waste a lot of time, a lot of money, a lot of resources and come up with nothing. If you’re going to make this something your company does moving forward, then definitely work with a specialist and have all… kind of the people I’ve worked with for a couple of years now their stuff is really, really good.
So, HMRC’s definition of this tax break, they basically say you have to be either using, creating, or finding an advance in the field of science or technology. Now that can be really jargon-filled, can really sort of giddy, not too sure exactly what they’re asking for. So, I always explain to my clients that it comes down to see different variations of innovation.
- The first one will either be new product development,
- second is innovating on advancing something that’s already on the market.
- And the third one, which is missed quite a lot, is process innovation.
Now, what exactly is it that HMRC are interested in? They call it technological uncertainties. To you and me, it’s the difficulties and the challenges of a project. And I’ll go into that a bit more later on.
Now, one important note is that Revenue and Customs don’t actually ever care about the end result. They don’t really care about what you’ve put out in the marketplace. They’re interested in the journey. So, I always use the cheesy example of the first man that landed on the moon. Okay, as much as that is giddy, that’s not the R&D. However, they built the rocket ship to take Neil Armstrong to the moon, that’s the R&D there. So, it’s the journey, not the end result.
And something that you know, they’re always keen for companies to put claims in for are things that are we call sexy topics. So, you know, things that are happening right now. So, big talks, big conversations, and you know, carbon reduction, modular build anything you’re trying to do to make something cleaner, or, push the planet into a better state. They’re all for it. So, it’s both of them up there are just a few examples. It can be 101 across different sectors. So, I’ll go into a bit of detail here just on the three different areas of innovation. This is a very general overview.
R&D, as you know, it’s a case by case conversation to have. But, this is just to give you a bit of a taste on, you know, what sort of activities you would do if you’re tapping into R&D. New product development, pretty simple, pretty obvious where research and development would be there, you’re bringing something brand new to the market. Typically, when you’re doing that, natural certainties and natural experimental phase will occur. Of course, if you’re developing something brand new, then how do you know it’s going to work? Just like the guys were seeing R&D is a lot of you can’t guarantee success, you have to go in, you know, whole, and give it your best shot and practice and try all through the way. So, when you’re looking at things like if you have internal discussions about, We’ve developed something, we’re designing something, we’ve manufactured, we’ve created something, all big indicators that you should be looking at R&D.
The second one, advancing something in the market. So, this is basically where you’re looking at the industry standard, you’re looking at what the market offers right now as a go-to solution and you’re going above and beyond that, okay. There’s got to be a reason that you’re pushing limitations here. There’s got to be a reason why you’ve had a job, and you’ve looked at the market for a solution and that solution just isn’t good enough. So, you’ve had to go above and beyond. Now, when you’re having conversations like, here’s where we would like to be but here’s where we are right now. But here’s where we would like to be. When you look at the difference there. You’d obviously want to look at your market to understand well is it a solution that fits right now? Has it been trialed and tested? Has it been accepted in our field and it’s totally safe? And it’s been done 100 times? If it is, and you use that answer, then no, there’s no R&D there, any competent professional would be able to do that answered as well. But this is more when you’re faced with challenges and there isn’t an obvious answer sitting there. Trialing and testing, phased approaches, you know, failed aspects of the project. These are, again, all indicators where you should be going, do you know what? That isn’t easy. And again, if you’re having those chats with your team, that again is a really good solid indicator that there could be potential for R&D here. Because revenue customers basically see that if the answer is simple, or if the way to overcome the challenge is pretty easy, bold standard. You have one meeting with your team and you come with a solution, then they wouldn’t pay on that because that’s information and knowledge in your sector that’s pretty standard. And you know, if you can come up with it within one day, sure Innovolo can come up with it within one day as well. Actually spending time and effort on pushing the boundaries, and it’s taking you some time.
The third one, process innovation, is actually one of my favorite ones because this is missed a lot, especially when it comes to construction and the architectural sectors. This is, ultimately, if you imagine two engineering firms, and they’re developing the exact same thing. Now it’s going to be the same, it’ll have the same functionality, it’ll do the exact same things. In the end, those two companies might not necessarily think that they’re entitled to claim R&D, that is they’ll look at the market and then say, “Oh, two of my competitors actually meet the exact same thing. So, you know, it’s not exactly novel, what I’ve done.” However, each of those companies is not phoning one another up asking, “Oh, listen, how did you manage to integrate this part into that part? And how did you manage to actually, you know, get that element effect with that component? Because we just had no idea how to do it. The fact that you aren’t exchanging trade secrets, and coming up with your own methodologies to create this product that is very serious in development sets, because you will have to use your expertise, your knowledge in the market field, you know, your knowledge in your sector, and take that, run with that. And then actually, there’s a lot of fame, you know, there’s a lot of problem-solving when it comes to process innovation. There’s a lot of okay, we’re actually going to have to take a non-common practice and implement it into our sector now. How often has that been done before? And how many studies have been done on that? Are there any foundations that we can work from? Those are the kind of conversations that you want to be having. And certainly, in construction and architecture, there’s many a job where you win the project, you think that it’s going to be simple, you get on-site, and it’s just problem after problem. And you may think that it’s just your day to day job to overcome those problems. But work with a specialist in R&D for it. Because, okay, if it’s your job, you may just assume that it’s, you know, there’s nothing extra there, speaking with someone like ourselves or your own specialist that you know off, there’s no harm to having a conversation on it.
So, again, a very high overview. I will get the guys to circulate these slides in case you want to look at them in a bit more detail. Purpose of this presentation, you know, it’s a combination of, you know, doing R&D in general, and the misconceptions of doing it. And in my, in my job, there’s a lot of rumors that I hear, and there’s a lot of bad press around not being able to claim. And it’s unfortunate, because, you know, obviously, you can believe rumors, etc. But I do like to just touch upon a few topics too, you know, raise any concerns and in case they’ve come up for you in the past. Let’s do it doing very quickly. So, my expenditure was all from funding. So, I can’t claim.
Countless things I’ve had people explaining, oh, my accountant told me that because I’ve got funding, I’m not allowed to do an R&D claim as well, and you’re talking, the funding could be hundreds of thousands of pounds, or it could be five grand. When you get funding or government grants, you ultimately will have terms and conditions there. And it will either see that its state that it’s stated or it’s de minimis. Now, depending on what it is it ultimately determines what type of tax benefit you get, whether you’re classified as an SME or a large company. So, the long and short answer is you can’t not put a claim in, you just don’t get as much money back as the, you know, the neighbor next door who didn’t get grant funding. So, you still can claim. My [inaudible 53:56] didn’t qualify.
This is actually one of my more common ones, Catax works with a lot of accountants purely because they know that they can’t be professional across every avenue of tax or every avenue of finance. So, if it takes a conversation like this for you to then say, I think I qualify for that R&D. I’m going to speak to my accountant about it. If they haven’t brought it to your attention until you’ve watched something like this, or until you’ve read about it yourself, it would indicate that it’s not a specialist field that they’re trained in. And it’s you know, they can’t be, they can’t know everything. An accountant is there to do your books. They’re not there to know every single avenue of tax. So, unfortunately, there have been many times where accountants have told their clients, maybe it’s lack of knowledge, maybe it’s, you know, plenty of… you know, there’s other reasons why we advise our clients not to claim but unfortunately, it has meant that you know, many clients do miss out on a claim. My advice is that this is a very niche area of tax. There’s no harm in speaking to a specialist and getting some advice on it, we will come working with your accountant. That’s the best scenario for everyone because your accountant will want the best for you, they do want the best value for their client. So, they do tend to want you to get some advice on the topic. And trade secrets, developing on processes. So, that was sort of what I mentioned about the engineering example. You know, this leads on nicely to the next point on the project’s field or it’s my job to problem solve. Well, okay, it may be your job to problem solve and you may have a project where you’ve tried to design three prototypes and only on the third one did it then work. Or you might actually have tried to develop something and you’ve tried it three, four times, and it’s still not working. So, you give up on it. That doesn’t mean that you can’t make it claim just because it’s not been successful. Failed projects do qualify as well, as long as you can showcase that you have done, you have done that the process. You have gone through you know, the challenges and the technical uncertainties. When I’m talking about the job and problem solving like I was saying, you may be on-site and your job may be to problem solve and overcome issues and come up with new quirky, unique ideas to do things, don’t brush it off, have a conversation about R&D because you could be missing out on a lot. And buying off the shelf products equipment.
So, again, say breweries or manufacturing plants, they might say well actually however much I’ve spent on this piece of machinery, it doesn’t count because I just bought it off the shelf. And to an extent they are right. So, if you buy equipment, and you use it for the intended purpose that it’s bought for, then no, there’s no R&D. I could buy the exact same piece of equipment and I could do exactly what you’re doing. The R&D comes when you buy that equipment, and then you bespoke it, maybe you’re wanting to implement it into a piece of machinery you already have. Or maybe you look at the market and you say, right, I need a piece of machinery or software or I need a platform that does X. There’s not really anything out there right now, so I kind of have to buy the next best thing and adapt it. Again, that’s R&D because you’re not buying something and using it exactly how it was purchased for, you are having to change it up. And finally, profit versus loss. I have a lot of people that come to me and say, “My accountant told me because I’m not actually making any profit, I’m not paying any corporation tax, which means I can’t actually get this benefit.” Again, it’s total nonsense. If you have a profit-making company, the objective of doing a claim like this is to reduce your CT bill as much as possible, if not annihilate it completely. But, if you’re a loss-making company, what you get is a hard cash injection. It’s just a difference in the percentages that you get paid out.
But please do not [inaudible 58:07] if you’re a loss-making business. If you have invested money and time and resources in trying to do R&D, it’s absolutely worth a chat. And one point I did forget to mention at the very beginning is the really cool thing about this legislation is you can go to a few tax years back. So, actually, this has been really helpful at the moment with my clients, because COVID has really hit hard with a lot of businesses. This is about claiming money that you’ve spent two years ago, you can reinvest it now. And that has helped a number of clients move on.
Euan, just a heads up, I can’t actually see any questions coming in. And so, can you just keep your eye if there’s anything because I can’t see, you know, the notifications coming up. So, just keep your eye up if there’s something you want me to go over.
Euan: There’s plenty coming in, so we’ll cover those off shortly.
Karen: Okay, super. I won’t go into huge details on the case studies. I’m not going to bore you word for word, but it’s just to explain R&D in a few different sectors. This is a client actually through Coronavirus that came on board. They were working with automotive battery packs for the electric car sector. And there was a huge amount of research, a huge amount of trialing and testing, a huge amount of analysis. And this client got up to £54,000 back, total fluke, he had no idea that it was such a big amount of money he was due back. He sort of assumed he made the assumption that HMRC looked at what you get paid for the job.
And actually, they don’t care what you get paid for the job. They don’t care if you need one pound from a job or a million pounds. What they’d interested in is from you as a business how have you expended money on this on this project. There’s a variety of things that we look at [inaudible 59:58] But, yet again, just lack of knowledge in the field and £54k came in back to them. [inaudible 60:00] so recycling, recycling products and turning them into useful, you know, advances. That’s not new. But the methodologies and the processes that companies follow are always expanding. This one, in particular, is really interesting because they had developed new methods that did exist elsewhere overseas, hadn’t existed in the UK. And I think there’s a lot when it comes to architects, and especially modular buildings, where companies are trying to replicate models that work in other countries and the UK, but they come across a huge amount of headaches and challenges because you can’t just copy and paste what works in one country into the UK. So, this was a really interesting one. And it was a million-pound cost that this client got back as well. Finally, just construction, and I’ve underlined more historical standards purely because, again, this is what I find, when you look at the marketplace if you’re looking for an answer and there’s very limited knowledge out there, there are very limited historical standards, you’re kind of at a loss, and you’re kind of having to rely upon your knowledge, rely upon your team. And you have to assess the situation on what your basis is that you’re starting up and then where you’d like to get to. And in this particular example, it was a listed building the construction team was working with. So, they had to… I’m sure the foundations of the building were more than 100 years old. So, they had to figure out well, how do we use foundations a century ago with modern technology having to be combined them together, but keep you know, the historic structure of the house? And how do we keep it, you know, looking the way the client wants it to look? So, there are huge amounts of challenges that you come up with on projects like this, and they take months, years, you know, to actually overcome. So, you might not even realize you’re doing it, which is why you should, you know, have a chat with someone. This client got back over £300k. Now, I do want to keep this very R&D focused because this was the purpose of that conversation. But I always like to just put a little bit and at the end for clients in case this does benefit them. If you do one commercial property, there is another tax break called embedded capital allowances.
The easiest way to imagine this is if you own a commercial building, tip it upside down and shake it. All the stuff that falls out, it’s typically things that your accountant would pick up on and claim tax back on. However, all the things that stick like your heating system, your electric or paint, your plumbing, your left, your kitchen cabinets, your toilets, etc. All those things are stuck in the building, those are the things that you can get additional tax relief for them. So, want to mention it one more, if you’ve got a commercial property, look into that. [inaudible 63:05] to remove any contaminants in land or buildings. Again, a great type of initiative if you’ve removed [inaudible 63:10] if you have, you know purchased some contaminated land, a brownfield site and you’re having to pay for a survey and you’re having to remove harmful contaminants, then the money you spend on that you can get some tax back. A big one for housing developers in construction and some in architect. And owning a patented product in the UK hand in hand with research and development.
If you own a patented product, there is something called Patent Box tax relief and completely worth looking into. You can basically half your corporation tax bill.
Now, there is a client who may be on this call. Ken, are you available? If you are, just maybe unmute yourself, or maybe is Amanda on? Maybe not. It was a client who I was hoping to bring on, actually, they had joined us during the Coronavirus, well, the start of the pandemic and they’ve actually created the first electronic meter in the UK. Again, there is one that exists in Switzerland, I’m sure it was, tried to replicate it, couldn’t. And then–
Kenneth Parke: Hello, can you hear me now?
Karen: Oh good. You’re there, Ken. Super! I was just explaining briefly the project that you’ve worked on. And I suppose that the main question I was wanting to ask you was initially you start with you know, oil and gas in the industry, you’ve now taking it more electric, making it greener. Did you know that when you started this project doing research and development was going to be such an important part of the business or were you just looking at gaps in the market and decided, let’s do it? What was your thought process with it?
Ken: Looking at gaps in the market as there wasn’t an electric terminator in the whole of Britain. There were some in Europe. And I just wondered why there wasn’t one here. So, I tasked myself to develop one that was suitable for this country.
Karen: Super. And this is a project that you started years ago, you’re still in the process of it, you’re going to be taking it to new levels next year, yeah?
Ken: Yes, that’s, that’s correct.
Karen: So, a classic example of how if you’re incorporating it into R&D, it’s not something that you do overnight. And I’m sure you guys and all your clients will be with you for years because that’s just the nature of it. Ken, you had heard about R&D tax relief through Judy, your accountant, their accountant is sort of a partner of Catax. Were you aware of it before Judy had brought it to your attention?
Ken: No, what actually happened was I wondered if there was R&D available on the market. And I asked another partner within the same company as Judy. And he said he will look into it, spoke to Judy go back to me, and says yes, there is, and we went ahead with that. And hence, put me in touch with Catax.
Karen: Super. And then I suppose what advice would you give to others in the audience listening who maybe have an idea or want to push forward with R&D in their business, but they don’t quite know the next steps to take. What advice would you give them?
Ken: Ask the question, because that’s all I did. You know, was there R&D available? And went from there and I’ve been very happy with the situation up to date.
Karen: Perfect. The process as well. So, obviously, this is your first thing doing it. Ken, from the process from learning about it to getting the money paid out. How did you find that?
Ken: Very professional? Your company was very good at it.
Karen: Oh, good, good. Good. So, always nice to hear. Okay. And well, listen, I’d love for you just to share very briefly with the audience the next steps for your projects. Is there anything you’d like to say about it?
Ken: It’s expanding. R&D has allowed me to expand it and to look at different parts of it. And we’re traveling at a pace faster than we would have done otherwise. It’s been very helpful in that respect.
Karen: Super. Listen, that’s super helpful. Ken, thank you so much for coming on. And joining us, I’ll then pass back to Bradley and Euan, and I certainly hope that that quickfire 30 minutes on R&D tax relief was helpful for you all.
Ken: Thank you very much.
Euan: Brilliant. Thank you, Karen. Thank you, Ken. That’s awesome. And we do have just a few minutes for some questions and answers. We probably won’t get them all answered. We’ve got quite a lot come in and mostly fired at you, Karen. So, if I just pick a few out, obviously any that we don’t answer now live, we will answer following the event.
Q: My limited company is registered in Scotland. Does that count as being within the UK for HMRC?
Karen: Absolutely. Yep. Scotland, England, Northern Ireland, and Wales.
Euan: That’s brilliant, so that was a quick answer.
Q: Is there any R&D tax relief for any non-limited company?
Karen: No, it’s all to do with your potential to pay corporation tax. So, you don’t have to be paying it. You don’t have to be in a profitable position. But you do have to be expected to pay if you do make a profit, so as to do with Corporation Tax.
Euan: Yeah. Okay. And very closely related:
Q: Is there any limit to the hours claimable in R&D tax for the year?
Karen: Well, the years are limited, so you can only go two tax years back. So, I would actually suggest that if anybody does have an October yearend or November yearend if you are looking to talk about this subject, and then speak to someone very soon, because once you once your current year-end finishes, then you’re basically kissing goodbye to, the first year of the two before. So, I would say that if you do have a yearend coming up, have a talk with someone about this subject because you don’t want to miss out on what you can get back.
Euan: Thanks, Karen. That’s brilliant. Another one has come in, when claiming… this might be something for you as well to chip in here, Bradley.
Q: When claiming a tax credit and sharing information, how do we protect our ideas before filing a patent? You come across situations when a Scottish grant agent did state that it’s not customary to sign an NDA, what would be the best approach in such circumstances where you may want to delay filing a patent for various reasons?
Do you have any input on that, Karen, or Bradley, would you like to chip in that one?
Karen: I would certainly say we’ve sent many an NDA because it’s a natural concern, no matter, you can be reassuring a client, look, the conversation is confidential between two parties. But, if they’re more reassured for us to sign an NDA with them, then then we’re more than happy to do so. So, it’s strange to hear that if a client has, you know, a concern over the IP being shared, that a company would have an issue signing an NDA. But that’s just my personal take on it.
Bradley: Yeah, and yeah, same goes for Innovolo as well. Our standard modus operandi, if you like, would be to get an NDA in place with you as a client. And that goes for our entire supply chain, as well. So, and our partners such as Karen, all covered by NDA, so there should be no risk of your idea being leaked. There’re a few other questions, Euan, on the chatbox here that we might be missing. They’re not on the Q&A box. There’s one here from Samuel:
Q: We’re about to kick off a project part-funded by a public body, would this mean that grants are not eligible for tax credits, but the match funding would, or none?
Karen: So, what I would suggest as again, try not to worry about external money coming into the company. When we do a claim, we want to understand your accounts, your books, what money has been spent on the project. Now, if you have, you know, wait for a grant or you’ve got some sort of funding, and that’s obviously going through your accounts, then that’s fine, but we would just obviously want to understand how much has been allocated to the R&D project and how it’s been spent. So, I wouldn’t say that in no circumstance if you get any sort of funding, can you not claim R&D. You can always still make a claim. It just may not be as high as you’re expecting or as high as [inaudible 72:12] But, you know, that’s the conversation… Oh, Samuel Chapman, I think I actually know you. That’s a question that we keep going a bit more in-depth on if you want to reach out after.
Bradley: The bottom line is, let’s have a conversation. And let’s figure out, I think Brian’s got a good–
Euan: Just on that point, Bradley, if you want a conversation, sorry, just might be a good point, just to say it now, and the best way to get in touch actually, so that you get the backing of Innovolo as well, to help you through any other issues you may arise during your development, and claiming the R&D. If you email email@example.com, then both Innovolo and Catax will be available immediately to assist you.
Bradley: Yeah, we’ll put that on a follow-up email anyway, just so everyone’s got that. And this is quite an interesting just question from Brian:
Q: Buying data sets and modifying the arrangements to fit and then doing calculations with that, is that equal to buying an off-the-shelf product? And would there be tax credits eligible?
Karen: Yeah, I mean, that is quite vague because part of me would think, well, if what you’re doing was already existing on the market as a solid platform, then why wouldn’t you just buy that? So, the fact that you’re having to buy individual data sets, tweak them, modify them, maybe integrate them, make them talk to one another, the question wouldn’t be so much right, well, why doesn’t one like that exist previously? The question would be how easy is it to get these software packages talking to each other? If it’s never been done before, what’s the reason for that? Has there fundamentally been a flaw in the system? Or, you know, has there been a major problem in the market that’s preventing these data sets from talking to one another before or being modified before? So, I mean, it’s like I said, I can’t say too much more based on the one question but it’s a conversation to have, the fact that you’re actually having to modify things.
Bradley: That’s very helpful, very helpful.
Euan: Thanks, Karen. There is one last question that we are just going overtime now, one last question is:
Q: with the current situation [with COVID] is it wise to invest in R&D?
And this is actually a misconception that we almost included in the first slide that we went through at the beginning of this presentation, was that in the R&D or innovation is expensive. And I think this is probably it probably ties in quite nicely with this question. Do you want to elaborate on that, Bradley?
Bradley: Flipping it on its head, can you afford not to do innovation right now? It’s a well-known saying, innovate or die. We’ve seen over the past few months, big corporate, smaller SMEs, go under alike, the challenges that businesses are facing today are unlike any that we’ve perhaps seen before. And if we’re not continually trying to keep ahead of the pack, and anything or way around those risks are coming up, we’re toast to quote another.
Euan: This question essentially actually answers the question as well. It says, it says, with the current situation, is it wise to invest in R&D? Invest being the operative word. Yes, it might be a large sum of cash, it might be a large investment, but it is an investment. And the return on investment typically, in the R&D field, in the innovation field is probably a lot larger than most other investments you’re able to make in your business. Has a huge impact on your business. Have you got any comments on that, Karen?
Karen: Yeah, just agreeing with you, it will come down to working smart with it. Like I was saying at the beginning, you could waste a lot of time, not waste the money, you know, doing things yourself thinking that you know all the answers, but have a conversation with specialists in the field. Get advice, you know, figure it out based on the market, when would be the right time to invest. And to be honest, there’s a lot of financial support out there. Yes, R&D actually comes after you’ve spent the money, but you know prior to spending, there are funding options out there depending on what sector you’re based in. So, again, just talk to people and find out, you know, what you can get to help finance as a burden.
Euan: And then once you’re on this journey of innovation, go back to the virtuous circle of innovation, you’ll find that the tax credits and all this support, you’ll actually be able to start your next round of innovation. And so it goes on, it’ll be very quickly if you do it right. And this is going back to what Karen was saying about doing it smart. You’ll be doing itself, you’ll be self-funding.
Karen: Yeah, there’re a few questions just before we leave. Euan, I’ll just quickly wrap up all in one. There are a few questions like
Q: What kind of projects are exempt? And how much can you claim back?
Long story short, guys, you probably are looking to get between 20 to 33% of your overall expenditure number. So, you know, if you look at your project, you look at, right, here’s what we’re spending on staff, equipment, software, you know, wasted travel, etc., we take all that, we spend a magic number, and it’s roughly between 20 to 33% that you get back. So, a decent amount if you’re spending, you know, £50k plus on this. Kind of projects that are exempt. I would services as a very tricky one, because Revenue and Customs, you know, they want to make sure that if you are offering a service, there needs to be some sort of science or technology behind the scenes. So, is there any software development involved with that? Is there any machinery or technology involved behind the scenes? But offering a service, in general, can sometimes be a bit of a kicker.
Euan: Thank you, Karen. That’s excellent. Okay, it’s probably time to close this event. So, we’d really like to thank you, Karen, very much for the insight today. And trust there’s been some really valuable key takeaways for everyone today. And I’d like to just take the opportunity to say thank you, Ken, for chipping in as well with your experience there. We really appreciate any feedback. So, please be sure to fill in the survey when we close.
And as was mentioned at the beginning, if you have any further questions or would like to explore your particular product development, please reach out and we will be very willing to assist you. With that, we’d like to remind you of the next event, to look out for the invites, and thank you all very much for your time, your contribution, and your feedback. And we would like to wish you all the very best for your endeavors and your future in innovation. Goodbye for now.
Karen: Thanks so much, guys. Take care, everyone.
Bradley: Thank you.
Euan: Thank you.