A research and development (R&D) tax credit claim for the food and beverage industry is one of the few sectors that affects everyone directly: we’ve all got to eat. Whether it is a new cake recipe, the latest gluten-free adaptation or an innovative method of preserving cheese, there is so much scope for R&D. As we all know the global food industry is huge. There is constant pressure on producers to make food healthier, cheaper, free-from, ethical, long-lasting, organic… Whether this pressure comes from regulators, consumers or other sources there is always a need to innovate.
A recent Censuswide survey of 500 senior managers and business owners by tax relief experts Catax shows a significant majority (74%) of senior managers and business owners at smaller UK food manufacturing firms say they’ve spent time and money ‘developing a new product or business process over the past three years’ – the basic requirement for an R&D tax claim.
This means that around three quarters of businesses involved in food manufacturing, from producers to packaging companies and their suppliers, could be due a sizeable tax windfall. However, more than a third (36%) of senior managers and business owners at smaller UK food manufacturing firms have never even heard of R&D tax relief.
Additionally, more than half (53%) of managers or owners who have heard of R&D wrongly assume the research and development needs to be successful to qualify for a tax relief claim. In fact the outcome of the R&D is irrelevant. What matters is the time and money spent developing the new product, process or technique.
Five drivers of R&D in the food and beverage industry
Commercial factors – These may not be the most exciting reasons for undertaking research and development with food, but they are nonetheless important. They include factors such as improving shelf-life – a demand that may be made by a key distributor like a supermarket chain that can’t afford to see stock spoiling on its shelves. Or alternatively an efficiency drive.
Legal and regulatory change – Often compulsory, so demands a certain standard is met. It can often be high profile, like the 2016 sugar tax announced by then chancellor, George Osborne.
Consumer trends – This is perhaps the most fluid driver of R&D in the food and beverage industry, and the one which can become most blurred with marketing gimmick. There may be a strong corporate edge to this kind of thing, but really it reflects companies trying to deliver what consumers want. If they didn’t serve this function and drive innovation, we would not be enjoying all the variety we enjoy today - healthy choices, organic, free-from, local are all examples of trends to which food companies have to adapt.
Ethical factors – A trend in itself, ethical considerations cover enough ground to warrant their own separate section. From animal welfare to fair trade, recyclable packaging to the debate around genetically modified food, there are numerous things that can drive research and development in the food supply chain.
Process change – Behind the scenes, there are all kinds of things that go on that require research and development in the food industry, particularly for manufacturers who operate on a large scale. Any requirement to increase output, improve standards or introduce new machinery is likely to require extensive testing to ensure that the end product remains consistent.
A new food or beverage product is one of the most obvious projects in which R&D will be involved. Market research is a notable exception to what may qualify as R&D for tax purposes, but many other parts of the new product development process may be eligible in an R&D tax credit claim. These include:
- Time spent refining recipe formulation,
- Experimentation with equipment,
- Managing environmental factors such as temperature and humidity,
- The cost of consumables like the ingredients that are tested, heat, water and power,
- Applicable staffing costs, including plant labour for R&D trials.
- So whatever the original driver of the project is, all the costs associated with the above should be considered for an R&D tax credit claim.