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How the Wheel of Innovation Impacts the Economy

Innovation is all about disruption. This forces businesses to evolve if they wish to remain relevant in today’s rapidly-changing economic climate. It is also a key factor in economic growth, without which enduring economic growth would be impossible.

So what exactly is innovation? The European Central Bank describes it as “the development and application of ideas and technologies that improve goods and services or make their production more efficient”.

Innovation is what keeps established enterprises from becoming stagnant, and it is in the DNA of all exciting startups.

Innovation, when done properly, challenges old paradigms, develops new ways of thinking, improves quality of life, and creates jobs.

However, innovation cannot be implemented without access to financing, particularly when it comes to Research and Development (R&D).

In 2000 the UK government introduced the R&D Tax Relief Scheme for Small and Medium-sized Enterprises (SMEs) as the leading resource of state support in the United Kingdom for innovative businesses.

The R&D tax relief for SMEs is readily available to any kind of incorporated company conducting innovation, irrespective of the sector in which it operates.

It consists of an R&D tax relief incentive for SMEs that enables enhanced deductions of 230% of eligible R&D expenditure from a business’ taxable revenue – offering an effective cost reduction of 26% after applying the corporate tax rate.

According to F. Initiatives, a consultancy firm which specialises in financing innovation, there are three key steps in the cycle of innovation, which starts with an idea that is developed into production, and from the production comes growth, and the cycle repeats.  

1) Development

New ideas are formulated, which create new products or services that lead to efficiency gains or new markets being explored.

2) Productivity

Improved efficiency makes it possible for businesses to produce greater output for the same input. For example; an innovation allows a baker to produce 12 loaves of bread rather than tenfor the same number of hours worked. This innovation has therefore brought about a 20% increase in productivity.

3) Growth

Improved productivity will mean improved revenues for the business which can then be reinvested to deliver further growth, discover new marketplaces or establish further innovations to provide more development.

Innovation Stimulates the Economy

Out of this cycle, the ripple effect begins to take form on the economy at large.

The actual innovation or new ideas approach brings about new opportunities in efficiency. Higher productivity can cause new employment possibilities, which in turn stimulate the economy.

A stimulated economy results in higher growth. The company becomes more profitable, workers receive better pay, and the increase in capital can be used to fund more inventive.

In today’s digital economy, jobs are increasingly automated, leading to fears that more jobs are going to be lost.

However, while automation may not generate new jobs initially, it does pave the way for spheres of employment that were never thought possible before.

Just last year VentureBeat revealed, “A Deloitte study of automation in the U.K. found that 800,000 low-skilled jobs were eliminated as the result of AI and other automation technologies. But get this: 3.5 million new jobs were created as well, and those jobs paid on average nearly $13,000 more per year than the ones that were lost.”

To allow innovation to generate new jobs, an educated workforce is crucial.

For innovation to succeed, F. Initiatives identifies 3 key avenues that must be explored: improved education, increased investment in research and development and better access to funding for entrepreneurs to bring innovations to market.

In the UK, R&D tax relief is available to SMEs that have:

– Fewer than 500 employees.

– Either: annual turnover < €100 million OR total balance sheet < €86 million.

– All entities within a group are included when establishing the threshold.

F. Initiatives’ extensive knowledge of the UK R&D tax relief schemes – and its on-going monitoring of changes in legislation – combined with a proven working methodology, guarantees the maximum optimisation of its clients’ claims.

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