How does the R&D tax credit work for food businesses?

28 February 2022

Creating an innovative product has many benefits, not least helping you to stand out from the competition. But did you know that it can be financially rewarding too? R&D tax credits are a fantastic initiative set up to encourage investment in innovation. But how does the R&D tax credit work for food businesses?

Companies from every sector can benefit from R&D tax credits, whether their specialism lies in cheese-making or chemical engineering. For drink and food businesses, they can be a valuable source of cash. Yet many companies still don’t realise that they can claim or aren’t sure how to do so.

To learn more about R&D tax credits watch this webinar recording.

When you’re a small business, it stands to reason that anything that can improve your cash flow is a good thing. For innovative companies, this is exactly what R&D tax credits aim to achieve. An estimated 85,900 R&D tax credit claims were made in the year ending March 2020. However, many in the food and drink sector are still in the dark about applying – whether due to lack of awareness, confusion about the process or being unsure of eligibility.

Anything involving tax can be intimidating so let’s break the subject down.

R&D tax credits – what exactly are they?

How does the R&D tax credit work - HMRC logoResearch & Development tax credits are an initiative from the UK government to support innovative companies who are pushing the bounds of their industry. In a nutshell, they are designed to encourage innovation and investment in R&D. For start-ups especially, they are an incredible valuable resource, allowing you to claim back certain expenses as a cash credit or tax deduction.

For a loss-making business, this is given in a form of a cash grant by the government when you complete your tax returns at the end of the year. The credit applies to all qualifying spend that is ‘innovative’, e.g., that goes towards developing a new product, service or process, or improving an existing one. Through the scheme, you can claim and get one third of all that expenditure back. This can still be the case whether the project is successful or not. If your business is profitable, the amount you’re eligible for is simply deducted from your tax bill.

Out of all claims made in 2020, however, only 325 came from the hospitality and food sector. Yet so many businesses in the industry are trying to do things that meet the criteria of an R&D tax credits.

How does the R&D tax credit work?

There are three main questions to consider when assessing your eligibility for R&D tax credits:

  1. Are you a limited company? Firstly, to be eligible, businesses have to be registered as a limited company in the UK and be subject to corporation tax. The scheme is open to SMEs – this means businesses with less than 500 staff and a turnover of under 100 million euros.
  2. Are you innovative? The second most important thing to consider is proof of your investment in R&D activities. This is defined as projects that seek to advance your overall industry, not just your business. More specifically, within the realm of science and technology. This doesn’t necessarily mean putting gadgets and devices in people’s hands, it also applies to the technology of developing food and beverages.
  3. Have you invested in R&D? The last question to consider is, have you spent money on these projects? This means expenditure must have been incurred, though not necessarily ‘spent’. Expenses that you could claim for include salaries, subcontractors, and any materials you use to test your product within the R&D remit.

Eligibility and demonstrating innovation

The last key item to tick off to prove eligibility is to show that the project was not easy. This means showing that you’ve had to overcome challenges and obstacles. For example, did you have to consider different types of packaging for the best product shelf life? This all goes towards proving that what you’ve been developing is innovative, i.e., it wasn’t already part of public knowledge, or not enough data was available on the subject.

Froghop has helped many food and drink businesses innovate their product and process. If you’re an SME interested in claiming R&D tax credits, speak to us to start the process.

To learn more about R&D tax credits for food (and drink) businesses, eligibility and the application process, check out this webinar recording with John Miller of Addition Finance.