The creation of innovative new products to meet rising demand, the development of new production and/or storage methods and the refining and re-design of products to meet regulatory changes (e.g. sugar tax) are all examples of R&D.
Many businesses are claiming relief for these activities right now - maybe you can too. If this sounds like how to avoid paying tax, then it’d be fairer to define it as legal tax avoidance instead. R&D tax credits are a long-established tax benefit in the UK designed to incentivise businesses that perform innovative research and development, these developments can then be used to inform new manufacturing processes, technological developments, etc.
There are two R&D credit schemes in the UK; the Research and Development Expenditure Credit (RDEC) and Research and Development tax relief for SMEs. You can read about both on our blog here. Both schemes are similar, but the RDEC scheme is for larger businesses with higher turnovers and more employees. You’ll be able to claim back some 13% to 33% of tax incurred on R&D costs.
So, what sort of processes and activities count as R&D in the food and drink industry?
What Counts as R&D For the Food and Drink Industry?
Recent years have overseen rapid changes in food and drink consumer trends. The most prolific examples are the free-from market, where gluten and lactose-free products have taken the industry by storm.
The gluten-free market is forecast to climb from 22 billion USD in 2019 to 36 billion USD by 2026.
This has led to a raft of R&D tasks associated with removing gluten and lactose from various foods whilst retaining their taste and nutrient content.
Identifying and removing allergens similarly has involved a huge amount of R&D. Newly designed products will then need to be produced on a mass scale - this is also R&D. Packaging and storage requirements may need to be adapted to these new products also - that too is R&D.
Here are some ideas of what can count as R&D in the food and drinks industry:
- Improving taste or nutrition within an existing product
- Developing new product lines in free-from ranges
- New packaging solutions that help retain freshness or quality
- Packaging or storage that reduces material wastage or increases energy efficiency
- Development to comply with new regulations
- Altering the nutrients of products to reduce sugar, salt, carbs, saturated fats, artificial flavourings, etc
- Removing allergens
- Reducing preservatives or dyes
- Development of new and existing machinery to increase production efficiency and scale
- Research work in contamination or other areas of food science
Complying With R&D Tax Relief Rules
R&D tax relief has many caveats that relate to why R&D was necessary and whether or not established methods could be used in place of developing new ones.
Broadly speaking, R&D activities have to involve technology and science - not just cookery.
But, there is still scope for a host of developments within cookery and product design. For example, if you are altering an ingredient, e.g. removing gluten, then this could likely affect a whole chain of reactions that occur during baking, fermenting, heating, freezing, raising, etc. You may need to research how to remove gluten from that particular food, as well as how that affects your production line.
The task is to prove that:
- Your business was faced with a task that had to be overcome
- You could not overcome this challenge with pre-existing processes and strategies
- You, therefore, had to develop new strategies and/or processes - that is R&D
R&D occurs at almost any juncture of the ideation, design, production, marketing, and sales pipeline. For example, during production, you may be faced with the challenge to scale up your business production rapidly to meet new demand. Finding out how to do this without wastage and for the lowest possible cost could be R&D. The challenge here could be affordability, and there may be no pre-existing techniques you can use to scale up production under your budget.
When responding to a change in regulation, e.g. an enforced reduction in salt or saturated fat that affects your products, you may have to research your production methodology, looking into what times and temperatures you need to introduce your new ingredients into recipes.
You could also look into the efficiency of your production line, researching and development methods of reducing your energy usage and increasing sustainability.
In these situations, you’d have to first find out if there are pre-existing methods you can take advantage of to overcome the challenge.
If there are none, you’ll have to undergo R&D.
This might involve:
- Employing specialists (e.g. food scientists) to study recipes and advise changes
- Develop prototypes
- Modify or create new equipment
- Conduct independent research
You’ll claim back tax on any of these qualifying R&D costs.
If, as a business owner that operates within the food and drink business, you are asking yourself “how can I save money on tax” then evidently, R&D tax credits are an excellent area to look into.
Accountancy Cloud: The R&D Tax Credit Specialists
Accountancy Cloud are accounting and R&D tax credit specialists. We can work with your business to identify possible areas that already qualify forR&D tax relief, or could be adapted to qualify for R&D tax relief in the future. We can assist in your claim too, writing up a technical narrative that ticks the right boxes for HMRC.
Get in touch today to embark on your R&D tax relief journey!