Research and Development in Manufacturing (food and drink sector)

Manufacturing is a highly innovative UK industry sector in the UK with numerous companies are engaged in activities which meet the criteria for research and development (R&D) tax credits.

However businesses often fail to take advantage of research and development tax relief because they assume that their work is not eligible. While certain forms of commercial product development may not qualify, the manufacturing sector is constantly involved in a wide range of activities and initiatives aimed at advancing knowledge.

Taking the food and drink production sector as an example innovation is necessary as a result of consumer demand, economic pressure (for example cost of living), supply chain or regulatory compliance.  Food and drink businesses respond by developing new products to fulfil their preserved market need for example

 

    • Improving nutritional benefits
      • Reduction in salt, sugar, additives
      • Free-from gluten or particular allergens
      • Tailored to dietary need (high in protein or fortified in vitamins)

       

        • Alcohol free alternatives

    • Extending shelf life

    • Addressing sustainability or environmental concerns –
      • For example eliminating palm oil to protect the Rain Forest

       

        • Vegan or organic ranges

    • Reducing unrecyclable or unnecessary packaging

All product development requires investment and carries a high level of risk.  The Research and Development tax credit scheme is a valuable means to help subsidise the cost of such innovation.

To quality a project needs to seek to achieve an advance in science or technology and for these activities to address scientific or technological uncertainty. 

When it comes to food and drink products, creating new recipes or formulations is highly likely to fall under Research and Development. The process of innovating and developing these products often involves scientific principles.

Formulating and combining ingredients can introduce uncertainties in their reactions. Even a small change in one ingredient can alter the properties of the mixture and their behaviour in subsequent production stages.

There are also uncertainties in the manufacturing process, such as scaling production, implementing machinery, and establishing processes to ensure a consistent end product.

While meeting consumer expectations for taste, appearance, and unique selling points is crucial, products also need to fulfil various requirements related to shelf life, transportation, compliance with regulations, and affordability.

Utilizing new materials, developing innovative solutions to safety challenges, and integrating new technology can all meet the eligibility criteria. It is crucial for manufacturing companies to monitor their projects and research and development expenses meticulously, as they are required to provide detailed records of the qualifying activities. Seeking professional guidance is essential for a successful tax credit application.

Research and Development opportunities for Restaurants and Other Hospitality Sectors

Restaurants and hospitality businesses often overlook the opportunity to claim research and development (R&D) tax credits. Despite ongoing innovation in the form of new processes, services, and recipes, many are unaware of Research and Development tax relief and the activities that could qualify them.

For establishments like restaurants, bars and hotels, investments in delivering better service and advancing methods may be eligible for such credits.  This encompasses activities such as creating gluten-free recipes and developing new technology for hotel guests.

Qualifying expenditure includes materials, ingredients, and employee wages related to Research and Development efforts, making expert advice essential in this often disregarded area.

Examples of eligible activities include

 

    • The development of vegan and gluten-free alternatives,

    • Recipe experimentation – including different cooking or food preparation methods

    • Innovative customer booking apps,

    • New eco-friendly hotel laundry techniques.

For example, a restaurant successfully improved a signature dish with reduced sugar content after the head chef spent time experimenting with alternative ingredients and preparation methods.

Transforming a finance department into a business partner at a £20m education membership organisation – case study

Virtual Finance Directors moving the Finance Department out of the back office shadows to become a true business partner

Used correctly finance business partners are an expensive but valuable resource however in reality very often end up spending much of their time in data manipulation, reconciliations and reports which are of no direct value to a business. 

Typically this is a symptom of poor systems and processes but often also due to a lack of understanding as to what activities will drive business value.

Over the last 50 years finance departments have been attempting to change their place in business from merely bean counters – paying the bills and reporting what was happened as a fait-accompli into using this information to become forward looking business decision makers and drivers of performance.  This transition continues being a challenging journey since many finance professionals are much happier just crunching numbers rather than becoming involved in commercial interpretation and performance improvement.  In recent years improvements to even the most basic of accounting software have both reduced the time finance teams need to spend in data entry whilst offering the ability to report the same information in a variety of different ways with little additional effort – that said as the quality of data improves so has the demand and expectation from other business areas.

I have been involved in rolling out varying aspects of finance department transformation in several businesses and which very often is borne out a necessity for financial information.  Typically this request originates from either a Managing Director or their Board of Directors and comes with unrealistic expectation that with additional information and their sudden new found commercial acumen, the quiet finance department will save the business!  The latter often being the biggest obstacle to overcome – whilst an effective finance business partner’s commercial acumen should be the number one competency (even above that of bean counting), none the less they are only a voice at the commercial table (albeit influential) but ultimately responsibility should rest with the commercial directors.

Several years ago I worked with a Kent based college group which had acute financial difficulties attributed to poor cost understanding and a lack of individual course profitability analysis based on actual figures.  A top level annual budget was being prepared and the finance team were posting invoices to cost centres but further analysis was limited. 

Working with each cost centre manager the budget was recalculated by each cost type and significant supplier then into which month the charge would occur.  A similar process was introduced for commercial income so turning the budget process onto its head.  Monthly meetings to discuss variances and changes to future months were introduced between budget holders and members of the finance team.

Course income was generally funded through central government grants with the amount based on varying student or course criteria.  A process for calculating the correct income allocation per course was introduced as an intense annual task.  When applied to the costs analysis above provided performance by cost centre and course.  In normal circumstances this should have provided the foundation for the finance department to become involved in discussions about curriculum development especially in respect of required course attendance numbers and trends.

Unfortunately in this situation such analysis was left too late.  The results just gave meaning to the bank balance that due to insufficient student numbers, courses themselves were either loss making or that this became the case after central management cost had been applied. 

Had the finance team become business partners sooner it might have been possible to save this organisation. However this serves to strengthen the potential valuable role finance business partnering can have to a business.

As a summary the key priorities finance heads require to develop a business partnering function are –

 

    • Strong and accurate data (which is input in a way that no further reconciliation or sub analysis is required before it can be used for performance reporting)

    • Finance employees require up skilling in negotiation and influence to underpin their likely analytic ability.

    • An understanding of Board priority as to where and what suitable analysis and general business support will add value – volume of financial reports is not a guarantee of accepted value.

HMRC Takeaway Inspection Errors – Cake and Eat It!

A positive result for this business.  The article below demonstrates a common tactic used by HMRC in visiting the establishment as a secret customer and observing  – the restaurant/fast food sector is a soft, easy target for HMRC.  Another common strategy HMRC use is to visit a restaurant as a diner and leave a tip then audit its treatment during an inspection … sneaky.   We are aware of these and other tricks – make sure you stay protected and tax compliant!  

VAT Article Details

Mcvitie’s Blissfuls – VAT Outcome

McVitie’s Blissfuls – VAT Outcome

Not a sweet outcome for Mcvities this time with HMRC. Having successfully argued Jaffa cakes should be VAT free some years ago McVities luck ran out in the latest challenge – which though it pains me saying it was a fair outcome for HMRC!

Similar to the infamous Jaffa Cakes case, this too focused on the interpretation of the VATA 1994 Section 30 – which states food should be zero rated unless its “confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance”.

The Blissfuls case centred on whether the chocolate covered or filled the biscuits – which the tribunal ruled we covered and so subject to VAT. 

Detailed article here.

Food Industry – accountant perspective of Kent

How is accountant FD Solutions and Accounting supporting the Kent Food Industry businesses – focus on Paddock Wood, Maidstone and Tunbridge Wells?

As part of a group of Paddock Wood residents, in 2022 we purchased a threatened local 20 acre apple orchard.  Our aim was not a career change from accountants to harness our inner farmer ambitions but to prevent yet another part of the countryside falling into the hands of developers.   Once secured our initial intention was offering this to neighbouring apple farmers to maintain in return for limited access.  From the subsequent conversations accountants FD Solutions and Accounting held, it soon became apparent how much of a knife edge the fruit industry in West Kent is in.  Farmers of several nearby orchards are well above retirement age because their children do not have an interest in taking them on, else have been already forced into diversification and only just breaking even.  Either way none wanted additional orchard to farm.  Could it be that the orchards of Sevenoaks, Maidstone, Tunbridge Wells and Paddock Wood are heading in the same direction as the hop fields they replaced?  If so – what next, solar farms? 

This information is highly relevant professionally too since the food manufacturing and distribution sectors are accountants FD Solutions and Accounting key area of expertise and led us to wondering how this change could impact the overall landscape of Kent businesses.    Based on 2022 KCC Kent Analytics data Kent had 2,310 food production businesses (total South East region 11,560), out of a total 73,043 for all businesses or 3%.  At first glance this statistic appears low but this does not take into account business size (turnover or number of employees).  If distributors and resellers (including hospitality) are added this increases to 10% – hardly the Garden of England and beaten nationally by the South West and West Midlands.

Alarmingly the construction sector is Kent’s largest business group at 13,660 enterprises, which is hardly surprising considering the level of housebuilding currently happening and the proximity to the urban London suburbs.

Statistics aside the number of similar sector businesses make a strong business case for firms of accountants to specialise.   In so doing, offering an even higher value added service to challenged sectors.    Alongside the year end accounts I believe firms of accountants should provide specific sector financial information which helps support business owners.  As an insider accountants FD Solutions and Accounting know the quality of many of the agricultural sector’s in-house computer systems is somewhat lacking therefore any consultancy advice and financial information which can assist cash flow planning and decision making is essential.

As a capital expenditure heavy sector tax planning is crucial to ensure the best use is made of annual capital allowances to ensure where possible the full £200,000 annual allowance for 100% tax relief on qualifying plant and machinery is used.  Tax rules are complex and regularly changing therefore forward planning is essential to achieve the optimum position.   Working closely with local West Kent businesses around Paddock Wood, Tonbridge, Tunbridge Wells and Maidstone ensures accountants,  FD Solutions and Accounting maintain close links and an understanding of day-to-day business workings and subsequent medium term need.

We have noticed an increase in alternative land uses which take advantage of the government’s net zero 2050 pledge.  In addition to re-wilding and wild flower meadows there has been a significant increase in solar farms.  Each scheme qualities for varying government support and subsidies.  Renewable projects are a long-term investment which require professional advice throughout execution to ensure every aspect has been carefully considered – could this be the 21st century future of West Kent farmland?   Through being taken on by a neighbouring landowner the Paddock Wood orchard has a happy ending; some of the land will be used for a mixture of a wild hay meadow and spinney woodland – with what remains of the orchard being used for owner consumption and a small cottage industry producing bottled apple juice.