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How To Use R&D Tax Relief To Grow Your Online Retail Business

By RDP Associates


By Philip Steel - R&D Tax Consultant at RDP Associates

Establishing an ecommerce proposition may be easy from a technical perspective, but of course all of the usual commercial hurdles still stand before you. Fortunately, when it comes to the research and development stage, you can take advantage of R&D tax relief for online retail, and relieve some of the financial pressure.

In this article we will look at some important areas where R&D is usually necessary, with the bonus of potentially qualifying for R&D tax relief.

Growing pains

With all the online retail platforms that are available nowadays, setting up an ecommerce business should be easy. If you already have a product or service to sell, it’s simply a matter of selecting the right platform, using it to create an online store, signing up to some sort of payment gateway (i.e. PayPal), and launching your new enterprise. 

However, it is ultimately not that simple.  While launching an online retail business can be an exciting way to build your future, many online retail start-ups fail within the first 12 months. In fact, many sources claim that over 90% of ecommerce businesses fail, with some suggesting a failure rate of 97%.

While those figures are difficult to substantiate, there is little doubt that relatively few ecommerce start-ups survive and grow. According to the Harvard Business School, in the US 25% of all start-ups fail in the first year, of those that remain another 36% fail in their second year, with a further 44% failing in their third year. 

While those figures appear underwhelming, they are not quite as bad as they seem. Many entrepreneurs do fall by the wayside, but a large proportion pick themselves up and start again with much higher rates of success the second-time round.

The reason ecommerce start-ups fail is no different from why conventional businesses fail; they run out of cash. Of course, there are multifarious reasons why they run out of cash which include markets change, competitor, inadequate investment, poor marketing and bad tax planning to name a few. However, most of these reasons come under the umbrella of failing to carry out sufficient research. 

Looking at the ecommerce market from another angle, there are huge opportunities if you get it right. It is said to be a trillion-dollar industry growing at double digit figures with a massive potential for future growth. There are thought to be over a million ecommerce websites worldwide, although estimates vary considerably, but, according to RJ Metrics, in 2014 there were only 110,000 ecommerce websites generating significant revenues.

The industry is particularly top heavy; the top 1% of ecommerce businesses generated around 34% of total revenues; the next 51% of businesses generated 63%, and the bottom 48% generated just 3%. While these are just estimates based on Alexa rankings, they are reasonably convincing. 

eCommerce R&D opportunities

If your business relies on existing ecommerce platforms and shopping trolleys, then you are unlikely to devote much effort to software development. Producing content and designing ecommerce websites are not usually classified as R&D activities.

However, there is no ‘off the shelf’ solution fit for your needs and if you intend to develop new software and systems, or even significantly adapt/modify existing packages, then you are likely to need to invest significantly in R&D. Areas for R&D tax relief for online retail could include:

Website development

With all the websites that are out there, you might think that in terms of website development everything that could be done has been done. However, you would be wrong. A large ecommerce website is a highly complex beast. Even multimillion pound websites such as Amazon are far from perfect and could be improved, despite the huge resources that are continually poured into them. 

One of the principal problems is the search functionality. There are many other aspects of website development you might consider. Integration with back-office systems; inventory control; customer authentication and authorisation; these are just a few of the possibilities.

If your intention is to design a new web application or significantly improve an existing one, there is a high likelihood the work would be classified as R&D by HMRC and qualify for tax relief.  

Customisable products

Customisable products are a growing trend in ecommerce and many retailers who provide their customers with customisation options and tools have reported improved sales and increased customer loyalty. A survey of 1,000 online shoppers carried out by Bain showed that while 10% have used customisable options, between 25% and 30%  were interested in doing so. 

Although there is a clear case for satisfying customer demand for personally customised products, implementing such systems has proven a significant technical problem. The development of appropriate solutions has continued to receive considerable research input, and various customisable add-ons to platforms such as Shopify and some bespoke end expensive turnkey solutions are available. 

However, developing bespoke customisable functionality to your ecommerce website will almost certainly require considerable R&D input, whether you build it from scratch or adopt and adapt existing technology to your products. It is likely that this R&D would qualify for a tax credit. 

Big Data

Over recent years, modern ecommerce has become ever more reliant on big data. Never before have we had the opportunity to discover so much about customer behaviour and how we can influence it. Rather than market surveys and focus groups, today we can carry out multivariate (A/B) testing in real time and make marketing decisions on the fly. 

There is also a huge potential downside to big data. As a growing ecommerce business, the ‘three Vs’ of big data, its volume, variety, and velocity, is likely to grow exponentially. If you fail to handle it appropriately it is likely to prove a significant cost rather than a benefit. Simply storing, securing, and managing the data in compliance with current legislation can be a big burden. 

Putting big data to use relies on unstructured data solutions such as Hadoop, Apache Spark, and similar frameworks. Such tools make it possible to collect and store huge data sets and analyse them to reveal new insights that will help drive your business.  The big data analytics (BDA) market has grown apace. 

However, implementing a big data solution for your ecommerce business involves far more than bolting on Hadoop. Even many large business struggle with the dilemma of how they should best use big data. At the very least, you will need to research how you to use BDA to add business value; there is no blueprint for doing so. Implementing your plan will also require significant and ongoing R&D investment. 

Ongoing R&D Expenditure

During the priming and early growth stages of your ecommerce business, your expenditure on R&D is likely to be higher than at any other time. Once you have built and grown your business, there will be an ongoing requirement for R&D to maintain a competitive advantage.

According to the office for National Statistics (ONS) the UK consumer industry spends on average around 2% of its revenue on R&D. Of course this varies across sectors; according to Statista in 2014 the leisure goods sector spent 7.3% of its income on R&D. 

Of course, every case is different, but don’t forget to include ongoing R&D in your business plan

Finally – R&D Tax Relief

We have looked at some of the areas where spending money on R&D is likely to help your ecommerce business thrive and grow; there are no doubt many others we haven’t mentioned. And there’s R&D tax relief for online retail; the government is keen to encourage businesses to invest in R&D, and to help encourage this it has made R&D tax relief available.

To qualify for tax relief, your R&D efforts must meet certain criteria; essentially the work should seek to advance in technological knowledge and capability through overcoming technical barriers

In the field of online retail, costs of software development are often overlooked. If your company is creating or developing new products then this will almost certainly qualify.

You don’t necessarily have to do all the research in-house. While tax credits can be claimed on your own staff engaged in the work and, you can also claim for payments made to subcontractors such as software developers who help with the project.

Companies that are considered to be SMEs can now receive a net tax saving of 26% of qualifying expenditure if profitable, or a refundable tax credit of up to 33% if loss-making. 

Conclusion

Choosing the right products, getting a great website, good multi-channel marketing, SEO, excellent customer services and so forth all play an important role in growing your ecommerce business, but you also need good R&D to power your growth. 

Take advantage of R&D tax relief for online retail to make the process more resource-efficient.

  • Plan the important areas of R&D expenditure, bearing in mind the costs are often higher than expected, especially at the start.
  • Don’t limit your research and development to new projects or tools. R&D is an ongoing process, from which existing processes and products can also benefit.
  • Ensure your efforts qualify for tax relief.