Many food manufacturing companies are missing out on hundreds of thousands of pounds in tax reliefs they are entitled to each year, according to Research and Development (R&D) tax specialists Alma Consulting Group.
The company has revealed many food manufacturing firms are missing out on the relief they are entitled to either because they have never heard about it or they mistakenly believe they are not eligible to receive it.
Jennifer Tragner, R&D Tax Director at Alma Consulting Group, dispels some of the common myths that are regularly preventing legitimate claims from across the food manufacturing industry coming to fruition.
‘We don’t have a claim’
This is a common misconception that is fed by several factors, one of which is that there is no simple, one-size-fits-all checklist in place to determine what qualifies for relief. Added to this is the fact that many organisations do not view their R&D as R&D because it forms part of their day-to-day work.
However, by taking the time to look into their activity in detail, many food manufacturing firms actually discover the work they are carrying out, such as the development or improvement of recipes, processing techniques, packaging or preservation methods, is eligible for tax relief.
‘The system is too complicated for us to claim’
Of the £1.1billion relief awarded in 2011, the proportion claimed by large companies accounted for 67%. This is despite the fact that there were far fewer large company claims overall and the rate of relief for large companies is far less generous than for SMEs. This clearly illustrates that the relief given out to date, is heavily skewed to larger claimants.
Many smaller food manufacturing companies feel overwhelmed by the complex definition of R&D, which underpins the relief. Added to this is the long list of rules relating to eligibility and the expenditure that can actually be claimed, as well as potential interaction with other parts of tax legislation, such as intangibles, losses and double tax relief.
As it is a tax relief, the rules must be written into tax legislation. This can make them less accessible to smaller businesses however, help is at hand for food manufacturing firms. HMRC publishes its own guidance manual on the subject of claiming as well as dedicating a whole section of its website to this topic.
In addition, there are seven specialist units within HMRC whose primary focus is to provide R&D claims advice. Further assistance can also be found in the form of specialist advisors, who operate within this field and can help food manufacturing companies to scope out their claim potential and apply for relief on a no win, no fee basis
‘Tax credits are invisible’
R&D tax relief was introduced to encourage UK companies to increase the amount of R&D activity they undertake. However, the clue is in the name, and it may well remain hidden in the tax line of financial statements. This makes it largely ‘invisible’ to R&D decision-makers.
The Government has moved to address this issue with the introduction of R&D Expenditure Credit (R&DEC) in April this year. As a taxable flat-rate credit, it has been positioned as having enough hallmarks of a grant, meaning it can be accounted for ‘above the line’ and is more visible to those with the power to increase R&D investment. For large food manufacturers, this means that the R&DEC can be offset directly against operating costs, a welcome profitability boost at a time when margins are becoming ever tighter.
The R&DEC is available to large companies and certain SMEs that are restricted from the SME R&D tax relief regime due to their circumstances. Most SMEs can already access a payable cash credit for their R&D expenditure in certain circumstances. However, where an SME carries out R&D on behalf of a customer, or has received subsidies or grants to cover R&D expenditure, the SME is locked out of the more generous SME rates and access to the payable credit. These companies may claim under the large company scheme, but many have, in the past, chosen not to claim relief at all. The introduction of the R&DEC should be good news for many of these companies, who will be able to claim a cash credit for the first time.
‘Tax relief involves aggressive tax planning’
This is an extremely common misconception that is often raised in relation to R&D tax relief. The debate has also been further intensified with global news headlines involving corporate tax avoidance and evasion and the gap between what is legal and what is morally acceptable, continuing to be a hot topic of discussion.
In reality, many food manufacturing businesses do not realise there is a huge distinction between tax planning, where a structure or transaction is developed that results in a favourable tax position, and tax incentives such as R&D tax relief – a scheme designed by the Government specifically to provide a favourable tax position.
Food manufacturing companies do need to make sure they meet the relevant criteria and follow the rules, but if their claim is robust, they will be able to claim the relief they are entitled to.
‘The relief is going to be scrapped’
This may have been a legitimate concern a few years ago, with opposition politicians making no secret of the fact they did not support the R&D incentives in place.
However, it would appear the incentives are not only here to stay, but have improved in generosity in recent years. The rate of relief for SMEs has increased from 175% to 225% in the past three years alone. The introduction of the R&D Expenditure Credit for large companies also represents a significant step forward as it is the first time these organisations can obtain a cash credit for their R&D.
Looking ahead, while we cannot predict who will win the next General Election, the precedent has been set that the UK wants to attract, encourage and retain R&D companies. To do this, the incentives must remain globally competitive.