R&D tax reliefs explained: What support is being offered and who can benefit?

Independent retailers, producers and distributors are constantly investing in innovations in the food and drink sector, and thanks to a government incentive, many can be rewarded for this work. Research and development (R&D) tax relief can be a valuable resource for small businesses, but for many, ticking all of the boxes can be a confusing process. Ashley Pollock, assistant manager at business consultancy Ayming, explains the ins and outs of the R&D tax relief scheme.

Who can benefit from R&D tax relief?
For tax purposes, R&D needs to take place where a company seeks to achieve an advance in a field of science or technology through the resolution of scientific or technological uncertainty.

This means that any UK food and drink company that is investing in R&D can benefit from this tax relief, however they need to be employing someone from a food science or manufacturing engineering background or similar profession.

As an example, if a chef from a farm shop or deli is creating a new pesto to sell to customers this isn’t deemed technical enough to be eligible. However, a bigger manufacturer or even an SME that employs someone with a technical or scientific skill, that develops or improves a pesto would be eligible. It can be for new product development (NPD) or reformulation of a product, improving the taste, cutting costs, reducing waste, improving sustainability or increasing health benefits. There are a lot more technical variables to think about such as food safety, PH level, but you also have to be careful of flavour and costs.

It’s also important to note that the benefits don’t only apply to food products, but building new software or software integrations with, for example, the likes of Deliveroo.

What kind of support is being offered?
This depends on the size and position of a company. For SMEs, they can fall into one of two groups – profit-making SMEs and loss-making SMEs.

If your business qualifies as an SME under the R&D tax legislation, you could claim back up to 33p in every £1 of qualifying expenditure as a loss-making entity. This benefit usually comes in the form of an almost instant cash payment from HMRC. If you’re making a profit, then you could claim up to 26p in every £1 of qualifying expenditure. This could be realised as relief on your payable corporation tax, or in some instances as a cash credit from HMRC. From the date of claim, it tends to take up to 28 days for the money to hit your bank account.

How would you recommend a business approach this kind of support - what boxes do they need to tick?
Many companies are doing work in research and development anyway and are eligible to make a claim, so it therefore makes business sense to claim this money or tax back. Depending on the size of the company, there can be slightly different processes and benefits. For example, an SME will need to ensure it is a limited company in the UK that is subject to Corporation Tax.

It is worth noting that you can look backwards over the previous two years of work, as it is a retrospective regime. As such, there is no additional work required in terms of running a project, the company’s R&D/innovative work simply needs to meet the definition of R&D for tax purposes and then they can make a R&D claim. Companies can only make an R&D claim within two financial years of when the work was undertaken. As a tax incentive, the claim submission deadline has to follow their financial year, so the company needs to be aware of this and submit the claim with their tax returns for the relevant years.

The process can be broken down loosely into four main steps:
- Company eligibility (if the company ticks the boxes above)
- Eligible R&D projects (identifying the projects that can be eligible)
- Attribute the costs to the projects (financial calculation)
- Technical justification for the R&D (information on the projects including start and end dates, current state of knowledge in the industry, new knowledge or capability gained, technical challenges faced, trial and error process undertaken, etc.)

This process can be completed by a representative within the organisation, however it is lengthy and complex and can often end up in over or under claiming leading to fines. Some accountants offer this service where they normally charge a small fee, however they don’t tend to have the necessary technical knowledge and therefore aren’t able to take full advantage of the claim. Using service providers (general or specialist) is a popular method as they will understand the technicalities of projects, business and industry, alongside the complexities of R&D tax legislation, to ensure all the claims are maximised.

Where are you seeing particularly high level of innovation in food and drink right now?
The main areas of innovations have been reformulations to improve things such as sugar content, to meet the new sugar tax and health benefits by taking out nasties such as flavour enhancers (MSG) and binding agents (polyphsophates). There is also a big movement towards sustainability, including reduction of plastic packaging and the reduction of waste within the supply chain (repurposing biogases from sugar cane for use in food packaging). 

Other examples of areas where there have been high levels of innovation include the meat-free categories, regenerative farming techniques, the low- or no-alcohol area and innovative online platforms to connect customers with restaurants that are offering up their unsold, surplus food rather than see it go to waste

What’s the future for R&D tax relief - will this support be available post-Covid, or should businesses act now?
Luckily, this scheme is here to stay. In fact, over the past couple of years it has got more generous and with the UK economy currently suffering, the government is even more keen to support the food and drink sector and invest in the longer term development of it. In fact, during the last couple of months, HMRC has decreased the time to process claims. The companies that are going to do well in the future will end up paying more tax back into the economy.