Does your food and drink business qualify for R&D tax relief?

In this article, Cale Bannister at Myriad Associates discusses how the food and beverage industry, in particular, can benefit from R&D tax relief, as well as what type of projects qualify

The food and beverage industry is the largest manufacturing sector in the UK and despite already generating hundreds of millions of pounds a year, there are also ample growth opportunities. There is substantial and unrelenting pressure on producers to offer food and drink which is cheaper, healthier, longer-lasting and more ethically produced than ever before; whether this pressure be from consumers, regulators or competitors. These influences showcase the need for plenty of research and development and fortunately, there is also a vast Research and Development (R&D) budget available to match and support this.

There’s a huge amount of scope for R&D in the food and beverage industry today – but only a small percentage of professionals working within the sector are aware of this or take advantage of the tax relief incentive. Whether it’s the launch of the cheesiest-tasting vegan pizza, the discovery of a delicious sugar-free soft drink or an innovative way of keeping fruit fresh in the bowl, your organisation’s most recent project could be entitled to R&D tax relief, allowing a deduction of qualifying costs from the yearly profit.

The assumption that only technology and pharmaceutical companies are eligible for this financial incentive couldn’t be more wrong; businesses from a massive variety of sectors are eligible and can benefit from R&D tax relief.

What factors have the potential to drive and influence R&D in the food and beverage industry?

There are a few key areas which affect the need for change within the food and drink industry. This need for change keeps professionals in the sector such as food technicians, maintenance engineers, quality assurance managers, and many others busy.

Legal and regulatory changes

Although not particularly warmly welcomed, legal and regulatory changes are essential and cannot be avoided. They apply when government (or a government agency) make an informed decision to change a certain standard which must be met and are often high profile in the media.

Think back to the 2016 sugar tax which was unveiled by George Osborne – chancellor at the time of change. This particular directive sent R&D projects into overdrive as companies were required to work out how to reformulate the products they offer to contain less than 5g or 8g of sugar per 100 millilitres, without compromising on taste. Organisations producing and selling fizzy drinks comprising of sugar above the bracket would be subject to levies of 18p and 24p a litre respectively.

Projects like this are a perfect example of those that are eligible to R&D tax relief.

Brexit

As trade plays such a critical role in growth opportunity as well as the success and economic contribution that this sector can make, Brexit could have significant implications for the growth of the sector. Just over half (52%) of food consumed in the UK originates within the EU.

Supply chains are expected to be negatively impacted, which will lead to manufacturers facing many challenges as the UK is not self-sufficient in food due to the nature of its geographic position and size. It is expected that the largest challenge faced will be related to importing fruit, vegetables, tea and coffee as the UK simply does not have the climate to produce these products.

With these challenges and risks in mind, businesses should be ensuring that they are sufficiently prepared for worst-case scenarios.

Consumer trends

Consumer trends are particularly hard to keep up with, and even more challenging when it comes to the food and drink industry – making R&D activities rather costly. Keeping up to date with and adjusting your product offering and messaging to align with fads and health trends like “Why are fewer people drinking coffee?”, “What gluten-free products should be next in the range?” and “How can milk producers stay ahead of the game as more plant-based substitutes emerge” can be very challenging.

Despite the strong corporate edge and high costs to this kind of R&D, it tends to put companies in a good light as it strongly shows that they are dedicated to giving consumers exactly what they want – a great opportunity to up marketing activities and launch a new campaign for brand awareness.

Healthier options, vegan, organic, ‘Instagrammable’, subscription boxes, and local produce are all examples of consumer trends which companies would do very well not to ignore, allowing them to appeal to conscious consumers. Not only does R&D within this sector allow organisations to retain existing customers, but also puts them in a good position to attract new customers by enhancing their products and offerings.

Commercial factors and process changes

Much like legal and regulatory changes, commercial factors are not massively exciting, but still extremely important. Projects and activities such as improving shelf-life and driving efficiency within production fall into this category.

When it comes to the food and beverage industry a lot goes on behind the scenes, especially for manufacturers operating on a bigger scale. R&D is therefore often centred around process changes such as improved standards, increased output and new machinery and software solutions so that the end product remains consistent.

Whether you want to enhance your product to ensure it won’t spoil too quickly or are exploring how your food and drink can be as affordable to consumers as possible whilst remaining profitable at the same time, there’s a chance that you are eligible for R&D tax relief.

Ethical factors

A particular trend in recent years, the ethical production of the food and drink we consume is of ever-increasing importance. Food manufacturing is under scrutiny and consumers expect traceability through every stage of food production; in 2018, the ethical food and drinks market grew by 16.3%.

Incorporating and implementing software solutions can help with this. For example; customers want to know where their meat has come from, how it was reared and how animals were slaughtered, so traceability within the manufacturing sector is more important than ever. Software solutions allow access to information such as suppliers and proof of all products or inputs supplied, or date of every transaction or delivery at speed, and under intense pressure.

For things like tea, coffee, sugar and fruit, people look to be reassured that it’s produced sustainably and that farmers in developing countries are paid fairly. There are indeed numerous elements that can act as drivers for R&D regarding ethical factors in the food supply chain across the globe.

What kind of projects are eligible for R&D tax credits?

No matter what a food and drink company actually produces, the projects which can be supported in relation to R&D are many and varied. The production of new ranges is an obvious one, but others include:

• Improving food quality to enhance nutrition and quality
• Implementing modern manufacturing technologies that track and ensure the safety of food
• Increasing agricultural productivity; developing precision engineering approaches to agriculture, new crop treatments and better healthcare and breeding techniques for livestock
• Managing environmental factors like climate and weather

The costs involved in all of these projects – and many others – may well be eligible for an R&D tax credit claim.

How can food and drink companies claim for R&D tax credits?

Claiming R&D tax credits for development in the food and drink industry is not much different from any other industry. Depending on the company’s size, claims will be dealt with via a Corporation Tax return, either under the RDEC or SME scheme.

The process for claiming can be rather time-consuming and isn’t always straightforward. All eligible costs must be collaborated with evidence and added together so that the calculation for R&D relief can be entered on to the CT form.

Essentially, a company must be able to not only explain the R&D project in question but also demonstrate why it believes it qualifies for the relief. As with many tax-related issues, it’s vital to get your application right. Getting it wrong can not only be an expensive waste of time, but it can also land you in serious hot water with HMRC.