References:

1. Manufacturing
   Innovation – UK MOD teams up with industry to unlock the benefits of Additive
   Manufacturing – Defence Equipment & Support
2. Additive Manufacturing Solutions secures UK Ministry of Defence contract – TCT Magazine
3. Additive
   manufacturing, explained | MIT Sloan
4. Additive
   Manufacturing – an overview | ScienceDirect Topics
5. Additive
   manufacturing in defence (europa.eu)
6. 2024
   Additive Manufacturing Trends and Predictions (mitchellsson.co.uk)
7. What To Expect from Additive Manufacturing in 2024 | IndustryWeek

References:

1. Government Commercial Function – Net zero carbon in construction
2. RICS – Sustainable construction infrastructure
3. Future Homes – Future Homes Standard
4. Our Shared Understanding – Circular built environment
5. National Infrastructure Commission – A sustainable approach
6. Natural England – Green infrastructure
7. Gov UK – Understanding Biodiversity Net Gain

Claimant regions

HMRC’s data shows that 22% of all claims submitted and 32% of the amount (£) claimed in total was attributable to businesses with registered offices in London.

The second highest claimant area, the South East, accounted for 15% of total claims and 18% of the total amount claimed.

However, it is important to note that the registered offices may not be the same location where a business’s R&D activities are carried out, so this may not be an accurate representation of the saturation of innovative areas.

Claimant sectors

The top three sectors for claimant businesses are as follows:

• Information & Communication (23%)
• Manufacturing (23%)
• Professional, Scientific & Technical (16%)

While these three sectors combined make up 62% of total claims submitted and 67% of total relief provided, they are comprised of several SIC codes, posing the question of whether these percentages provide a full picture.

When taking a more granular look at the additional information released in this year’s R&D tax credits statistics, we can see that of the 16,210 applications submitted that fall under Information & Communication, for example, 12,345 relate to computer programming, consultancy, and related activities, which is 75% of the total.

Manufacturing, on the other hand, consists of a much wider range of sub-sectors or SIC codes. As a result, the five SIC codes with the highest number of applications make up 56% of the total. These are:

• Manufacture of fabricated metal products, except machinery and equipment (2,875 applications)
• Other manufacturing (2,580 applications)
• Manufacture of machinery and equipment n.e.c. (1,690 applications)
• Manufacture of computer, electronic and optical products (1,505 applications)
• Manufacture of food products (1,255 applications)

Our Sustainability Commitment

From day one, we have been actively contributing to the fight against the climate crisis.  

Working with incredible organisations, such as Ecologi, has allowed us to make our service a force for good.

In the last three years, we have:

• Offset over 150 tonnes of carbon.
• Funded 40 carbon reduction projects.
• Funded the planting of over 18,000 trees and the protection of over 195,000 existing trees around the world.

What is the climate crisis?

Often interchanged with the term ‘climate emergency’, ‘climate crisis’ is an expression that indicates the threat and impact of climate change to our planet and all its species.

Climate change is a result of years of human activity that has had a negative impact on our planet’s ecosystem.

Many believe that climate change simply means warmer weather, but this is a misrepresentation of a serious matter. Experts claim that climate change may render the Earth uninhabitable as the temperature of the planet becomes too high for life to survive. Rising global temperatures lead to more erratic and catastrophic weather patterns and melting ice caps; the latter raises the sea levels and may cause unprecedented flooding.

Without action, the climate crisis will deteriorate further, at a faster rate, and will lead to irreparable damage being done to the planet.

Current state of the climate crisis

The concentration of greenhouse gases, which trap heat in the atmosphere and lead to climate change, are at their highest level in 2 million years and continue rising^[1].

The earth is now 1.1°C warmer than in the 1800s (pre-industrial revolution) and warmer than any time in the last 100,000 years^[2].

The last decade was the warmest on record, and each of the last four have been progressively warmer than any other since 1850^[2].

These statistics are incredibly concerning, with thousands of experts agreeing that our best chance of ensuring a liveable climate is to limit global temperature increases to no more than 1.5°C^[2].

Despite the policies and strategies currently in place to combat global warming, it is thought that we will see a 2.8°C rise by 2100^[2].

What is the UK government doing for climate change?

The UK was the first country to create a legally binding commitment to combatting climate change with the Climate Change Act 2008 and subsequent formation of a monitoring body, the Climate Change Committee (CCC).

The Act set out a target of reducing greenhouse gas emissions by at least 100% of 1990 levels by 2050, making the UK’s economy net zero^[3].

The UK also signed the 2015 Paris Agreement on Climate Change, the largest international treaty, to join the global effort to address climate change and continues to position itself as a climate action leader.

Transport

Transport accounted for over a quarter of our emissions in 2021 and was the largest emitting sector^[8].

The government aims to ban sale of new petrol and diesel cars, install 300,000 public electric car charging points, and see electric car make up 80% of car sales by 2030^[8].

In March 2022, £200 million was pledged for nearly 1000 new electric and hydrogen buses. Non-zero emission buses will be phased out between 2025 and 2032, and all diesel-only trains will be removed from service by 2040.

The government is also aiming for net zero aviation by 2050^[9] and allocating £77 million of funding to help decarbonise shipping ^[10].

Energy

The energy industry heavily relies on the combustion of fossil fuels, that releases huge amounts of carbon dioxide (CO2) into the atmosphere.

Our World in Data estimate that the energy used in buildings alone is responsible for 17.5% of global GHG emissions^[15].

In the UK, 85% of homes are powered by natural gas, despite a Government proposal to ban gas boilers and the remarkable growth of greener energy such as heat pumps or infrared heating panels^[15].

Heavy industry and Manufacturing

Industrial and manufacturing processes are hugely energy intensive and account for one-third of global energy use ^[19].  

The UK government aims to cut the emissions of heavy industry and manufacturing by two-thirds by 2035 and introduce a per annum emissions cap that will reduce over time^[12].

This approach should incentivise companies operating in these sectors to invest in the implementation of new technologies to reduce their emissions and make their operations greener.

How can high-emissions industries address climate change?

The decarbonisation of high-emissions industries is crucial to achieve the substantial reduction of carbon emissions needed to meet the net zero target.

Investment in clean energy sources, technologies able to capture and remove CO2, and the electrification of vehicles are among the most impactful solutions to mitigate the amount of carbon produced by these high-emission industries.

Transport

Despite the Government’s 2050 target, the UK is lagging behind European neighbours Sweden, Belgium, Luxembourg, Denmark, and the Netherlands, that is taking the lead in its efforts to phase out fossil fuels and introduce EV charger density.^[14]

In the short- to mid-term, the UK’s transport industry can make strides in decarbonisation by adopting green energy solutions within its manufacturing processes and working towards improving engine efficiency to reduce emissions and accelerate development and launch of electric and hydrogen vehicles. 

Energy

The Government plans to switch the UK’s electricity to zero-carbon energy sources by 2035^[4].

The UK aims to increase offshore wind capacity by 500% by 2030 and has approved plans for eight new nuclear reactors^[6].

The Clean Energy sector is already making strides in innovation through testing and adoption of alternative energy sources such as wind, solar, hydroelectric, and bioenergy.

After over 50 years of development, in May 2023, the UK produced its trillionth kilowatt hour (kWh) of clean electricity, which would be enough to power UK homes for around 12 years. Current projections indicate that it will only take 5 years to produce the next trillionth kWh, highlighting an enormous progress in the speed of producing energy renewable sources^[16].

Heavy industry and manufacturing

Heavy industry and manufacturing are considered ‘hard-to-abate’ industries, as their decarbonisation is particularly challenging due to high emissions of CO2 produced.

To contain the amount of CO2 produced by these industries, the use of alternative energy sources such as hydrogen, both as a source of heat and as part of the chemical processes, could substantially reduce the carbon produced during manufacturing processes ^[17].

Furthermore, the implementation of carbon capture, usage, and storage (CCUS) is crucial to mitigate emission of industrial facilities and capture C02 that is already present in the atmosphere^[18].

Adoption of clean energy and CO2 capture solutions would allow businesses in the heavy industry and manufacturing to meet energy demands while simultaneously contributing to the elimination of fossil fuel use and reducing greenhouse gas emissions.

How can R&D tax credits support decarbonisation and improvements in sustainability?

To achieve net-zero targets, substantial R&D investments are required form UK companies to enable the economy to shift from fossil fuels to clean energy.

A few examples of qualifying projects for R&D tax credit relief include:

• Research into alternative fuels
• Development of new technologies able to power manufacturing processes
• Enhancement of the performance of electric vehicle batteries to allow said vehicles to have higher ranges
• Implementation of technologies able to capture carbon into manufacturing processes

Companies investing in overcoming technological challenges to achieve advancements in their sector could benefit from a substantial reduction of their Corporation Tax liabilities or a cash injection that could boost further investment in innovation and accelerate the shift to a net-zero economy in the UK.

How can lower-emissions businesses do their part?

The UK Government’s Climate Change Business hub was set up to help SMEs get started, providing over 4000 businesses so far with tools to help them understand their emissions, how to reduce them, and incentives to help them stay on track.

One of the UK’s key movements over the past two decades is ‘reduce, reuse, recycling’, following the passing of the Household Waste Recycling Act in 2003.

Since then, a drive towards recycling and working towards a sustainable economy has been increasingly adopted within businesses.

Carbon offsetting at Apogee

As part of our commitment to sustainability, we have partnered with Ecologi, a Climate Action platform that helps businesses improve their carbon footprint and grow more sustainably.

For each application we compile, part of our fee goes toward planting 100 trees through The Eden Reforestation Project and supporting carbon offsetting projects across the globe.

Thus far, our work has contributed to plant 17,335 trees and fund over 40 projects, avoiding over 100t CO2.

We’ve also invested in the Insights Calculator, developed by our partner SustainIt, that allows us to calculate the climate impact of our business travels and wastage and ensure we offset the carbon produced. 

Are businesses doing enough?

Our planet is in a state of crisis, and to prevent irreparable damage, experts have warned we must act now.

While the UK government is making progress towards its 2050 net zero target, greater support from businesses is vital.

Organisations like Ecologi allow businesses to access and utilise solutions to help offset emissions, but the UK’s largest sectors must also consider their processes and switch to carbon neutral energy solutions to create real change.

The UK government has so far hit its milestone goals towards the 2050 target; time will tell if this continues.

As part of HMRC’s campaign to clamp down on erroneous and fraudulent R&D claims, they have launched the Mandatory Random Enquiry Program (MREP). ^[1]

The MREP is part of a wider HMRC risk assessment strategy that aims to prevent abuses of the R&D schemes. ^[2]

In this blog, we’ll take you through everything you need to know about the increase in HMRC’s queries as part of the MREP, the implications on your R&D claim, and how we can support you.

Why has HMRC introduced MREP?

As abuse of the R&D schemes has grown over the last few years, so too has scrutiny over HMRC’s ability to manage the schemes effectively. ^[3]

In response, HMRC are taking action, with their stated aims of better understanding the level of non-compliance and ensuring the Government’s money is awarded effectively to support legitimate claims. ^[2]

The MREP programme aims to investigate non-compliance levels by selecting a random sample of claims and examining these in greater detail. ^[1]

HMRC has said:

“Random enquiry programmes allow HMRC to estimate the extent of under-declaration of liabilities arising from the submission of incorrect returns. Each return selected is subject to a full enquiry involving a complete examination of books and records.^[4]

To support the new programme, HMRC’s R&D compliance team has grown significantly, allowing them to investigate a larger proportion of claims. ^[5]

What effect is this having?

The increased focus on claims means the R&D tax relief industry – including us – is seeing an increase in the number of applications being queried, regardless of their eligibility and strength.

Therefore, it’s important to be absolutely confident on the eligibility of the claim and ensure this is well substantiated by a strong narrative. Failure to substantiate claims can result in HMRC requiring adjustments or may even result in penalties. ^[6]

How does it work?

The enquiries are random, and we can’t predict which applications will be flagged by HMRC.

It’s important to know that if your application is selected, it doesn’t necessarily mean there’s a problem with it.

Once an application is selected by the MREP, HMRC then need to launch an enquiry into that application. ^[7]

Some businesses will be more likely to see enquiries coming their way. The following characteristics make a claim more likely to be flagged in the risk assessment process:

• Change of circumstances – for example, if your R&D tax claim is significantly larger than previous years
• Your business is within a sector that typically doesn’t involve a large amount of R&D
• Goup companies contracting internally, sharing R&D activities, or those with international stakeholders or investors
• If your business receives grants as these circumstances often result in a greater number of errors in R&D claims ^[7]

What happens if your claim is selected for an enquiry?

If selected, HMRC is likely to request additional information to verify the eligibility of an application in greater detail. ^[8]

HMRC will send a letter to notify you that they are opening an enquiry or a compliance check on the application. In most cases, the letter will include the additional information that HMRC is looking to receive and the deadline for it.

It’s important to acknowledge that postage could often reduce the time available to prepare the response, so it’s advisable to ask for more time to avoid the risk of missing the deadline.

At this point, the claimant will need to collect all the additional information requested and supporting documentation and combine this into a formal response that will need to be submitted to HMRC. ^[8]

Once the response is received, the case worker will examine the additional information and answers provided and make a decision on whether to close the enquiry or investigate the case further. ^[8]

Taking care of R&D claims in-house? Here’s how to prepare for an enquiry

While there’s no guaranteed way to avoid your claim being subjected to an enquiry, there are ways to ensure your business is ready for enquiries in future claim periods:

• Keep on top of tracking and recording R&D expenditure and activities throughout the year.
• Keep a detailed record of expenditure, the activities they relate to, and how you’ve calculated the claim amount (if you’re doing this in-house).
• Provide sufficient supporting information with your claim by ensuring your technical report includes a strong narrative able to support your costs while addressing HMRC’s guidance.
• Take your time when recording calculations and figures for your claims to avoid errors.
• Make sure you understand what you’re claiming for and why.

If you need help with any of the above, get in touch and we can talk you through it.

How can Apogee help?

 If you work with Apogee for your R&D relief and receive an enquiry from HMRC, the first step is to inform the team and send us a copy of the letter. This could also be received at our address, in which case we will inform you right away.

We can act on your behalf and will communicate with HMRC to bring the enquiry to a positive conclusion.

One of our experienced R&D experts will handle the process, supporting you in the identification of all the relevant information requested by HMRC (this usually just involves referring back to the relevant points in the technical report we have already compiled for you).

We will also articulate a comprehensive response that addresses all of HMRC’s concerns, supporting the answers with references to relevant sections of the guidance.

Once the response is completed, you will receive a draft for your approval and, providing you’re happy with it, the team will send it to HMRC on your behalf.

How can you help HMRC process your claim faster?

In a message to the Chartered Institute of Taxation, HMRC have provided the following guidance:

• Please ensure you have completed all entries on the R&D section of your Corporation Tax return (CT600 form)
• It is now mandatory to submit additional information with your claim, such as the R&D report, to will help HMRC process your claim quicker
• Review the latest guidance on completing your CT600 form on GOV.UK
• If you submit a claim that is incorrect, inflated or fraudulent then you may be liable to a penalty. Read HMRC: standards for agents. ^[9]

How to defend your MREP query for R&D tax relief

So, you’ve submitted your application for R&D tax relief, and it’s been selected by HMRC’s Mandatory Random Enquiry Program (MREP).

Your chosen agent has responded to the query and provided the additional information requested, but it’s still not been resolved.

What do you do next?

If HMRC takes an opposing and entrenched position towards your claim, but you still believe in the eligibility of the work, where can you go from there?

Option 1: Ask for a Statutory Review

If you’re unhappy with the decision given by HMRC, you usually have 30 days to file an appeal. ^[10]

HMRC will then usually give your case to another tax officer who will conduct a second review of your claim and the initial decision made.

You should receive the findings of your review within 45 days, which can result in the reversal of the original decision, an adjustment to the decision made, or an amendment.

If the decision from the review is unsatisfactory, you can then take the matter further. ^[10]

From there, it’s crucial that you get professional advice and support to help you navigate the next stages.

Option 2: Ask for Alternative Dispute Resolution (ADR) 

An Alternative Dispute Resolution (ADR) consists of a mediator trained by HMRC working with you and the officer dealing with your case. ^[11]

Their role is to help both parties find a way to resolve your dispute.

When you submit an application for ADR, HMRC will review it and get back to you within 30 days to let you know if this is the right route for your case. ^[11]

HMRC states that ADR is particularly useful in cases where:

• Communications have broken down between you and HMRC
• There are disputes about the facts
• A dispute appears to be the result of a misunderstanding
• You want to know why HMRC has not agreed evidence you have given them, and why they want to use other evidence
• You’re not clear what information HMRC has used, and you think they may have made wrong assumptions
• You want HMRC to explain why they need more information from you.” ^[11]

If your application is rejected, or your case can’t be resolved through the ADR process, your mediator will give you advice on what you can do next.

Option 3: Appeal to the Tax Tribunal. 

The First-tier Tribunal for tax is an independent body, operating outside of the Government and HMRC. ^[12]

Use of the Tax Tribunal tends to be a last resort and can therefore only be used after an unsatisfactory review or ADR experience. You typically have 30 days to appeal to the Tax Tribunal from the date of your ADR or review decision. ^[12]

How does the process work?

You’ll get a letter from the tribunal to tell you what will happen next. You may be asked to provide supporting documents for your case, and it’s possible that you’ll be invited to attend a hearing (if not you can ask for one).

You’ll need to provide all documents relevant to your appeal, along with the notice of appeal, your decision letter, and any responses you made to HMRC.

You can represent yourself or have a legal adviser, tax adviser or, accountant to represent you. Your case will need to be presented and explain what has been agreed, what you think is wrong, and what evidence you have to support your appeal. The other party (HMRC) will also present their case to explain the decisions made against you.

You’ll get the tribunal’s decision, usually in writing, within two months. If your case is lost, you can ask for the decision to be ‘set aside’, if you think a mistake was made, or appeal it.^[12] Find out more about these options here.

Who should you contact if you’re concerned about your claim?

HMRC is requesting that companies refrain from getting in touch with them directly and instead speak with their agent. ^[13]

If you need support with an HMRC’s enquiry, consider getting in touch with Apogee.

The team has extended experience in the R&D tax relief space and have compiled almost 700 applications collectively, meaning that you can rest assured your enquiry will be handled professionally by experts with years of experience in the industry.

Remember, receiving an enquiry doesn’t imply your claim is ineligible. Apogee are here to defend your claim and ensure you receive everything you’re entitled to.

If you’re concerned about an enquiry, or need help with your R&D claim, don’t hesitate to get in touch with us. Our team is always happy to support you.

SOURCES

^[1] HMRC’s approach to Research and Development tax reliefs. www.gov.uk. Section 1.2, Paragraph 3.

^[2] HMRC’s approach to Research and Development tax reliefs. www.gov.uk.

^[3] More expertise and resource are required within HMRC to tackle fraud and error, says Lords report. www.parliament.uk. Paragraph 9. 

^[4] Making Tax Digital for business. www.gov.uk. Section 5, Subsection 4, Paragraph 7.

^[5] HMRC’s approach to Research and Development tax reliefs. www.gov.uk. Section 1.2, Paragraph 5.

^[6] HMRC’s approach to Research and Development tax reliefs. www.gov.uk. Section 2.2, Paragraph 5.

^[7] How to avoid an R&D tax relief enquiry (P.S. you can’t. www.forrestbrown.co.uk Section 2, subsection 3.

^[8] CIRD80525 – Practice note for R&D specialist units – HMRC internal manual – GOV.UK (www.gov.uk)

^[9] Research & Development Tax Credit (RDTC) payment delays – an update

^[10] Disagree with a tax decision. www.gov.uk.

^[11] Use Alternative Dispute Resolution to settle a tax dispute. www.gov.uk.

^[12] Appeal to the tax tribunal. www.gov.uk.

^[13] HMRC compliance checks: help and support. www.gov.uk. Section 7.

More and more businesses across the UK are now putting strategies in place to ensure they are doing their part to combat the climate crisis. 

Oftentimes, the implementation of measures to tackle carbon emissions requires companies to invest in the development or integration of technologies able to lower their emissions. 

In many cases, the activities undertaken by these companies are likely to be eligible for R&D tax relief. Let’s find out more.  

What is R&D tax relief? 

The R&D tax relief is a government-funded program that provides financial assistance to businesses that spend money on research and development (R&D).  

The incentive was developed by the UK Government to promote the growth of innovation within the UK and, in turn, stimulate the economy.  

What is the benefit of R&D tax relief for climate-focussed sectors? 

As stated by the International Monetary Fund [1], innovation will be critical to achieve the 2030 decarbonisations goals of the UK Government. In this context, the R&D tax relief can be a significant source of funds for businesses that are investing in the modification of internal processes, implementation of technologies to reduce their environmental impact, or for those that are developing new technologies that are new to the market.  

The R&D tax relief allow these businesses to recover a portion of their costs related to staff time, software, materials, energy utilised in R&D projects, and also subcontracted work necessary for the accomplishment of these projects.  

With two incentives, one designed for Small and Medium Enterprises (SME) and the other for larger organisations or SMEs receiving grant funding (RDEC), the opportunity to receive a Corporation Tax reduction or a cash injection expands to businesses of all sizes! 

Which sectors can benefit? 

The number of climate-focussed sectors are growing year on year, with many sectors developing so rapidly that we are seeing new industries entering the market. 

In the last decade alone, we’ve seen a drastic increase in growth of size and importance of the Renewable Energy, Sustainable Agriculture, Waste Management, and Manufacturing of Electric Vehicles.  

Let’s explore how some of the industries that are facing the challenge of reducing their environmental impact can benefit from R&D tax relief. 

Carbon intensive sector    

The carbon intensive sector is a broad term used to incorporate industries involved in the production, use and capture of carbon.  

Businesses within this sector are now heavily focussed on developing technologies to mitigate the amount of carbon produced during manufacturing processes and remove existing carbon dioxide from the atmosphere; these technologies are known as Industrial Processes Carbon Capture and Storage (CCS). 

Companies involved in projects aimed to enable CCS technologies to capture higher percentages of CO2, or to scale these solutions, are likely to qualify for R&D tax relief, allowing them to recover a portion of their investments in R&D projects. The relief could also benefit those companies that are implementing carbon capture usage and storage (CCUS) solutions within their manufacturing processes to reduce emissions and produce low-carbon energy to replace fossil fuel as an energy source.  

Energy  

Since the passing of the Climate Change Act 2008 in the UK, the energy sector has been one of the leading influences in the country’s decarbonisation efforts.  

Businesses under the energy sector are consistently developing and adopting new technologies and systems that enable the generation and distribution of energy to be done more efficiently, making them eligible for a Corporation Tax reduction, or a cash credit, through the R&D tax relief.  

With the benefit received from the relief, businesses could see an increase in the funds available to allocate to R&D projects and a subsequent acceleration in the commercialisation of these innovative solutions. 

Automotive and Transport 

The impact of transport on the environment has been a hot topic since the 1950s when the first study was published by scientists who found that burning fossil fuels for transportation was a key factor in carbon emissions.  

The decarbonisation of the Automotive and Transport sectors brings numerous technological challenges with it, such as issues with vehicle’s ranges, battery performance, and charging times. From an infrastructure point of view, further issues are represented by charging capacity of stations and lack of space for larger vehicles. 

Companies involved in projects aimed to solve these issues and develop innovative solutions able to facilitate the electrification or decarbonisation of the Automotive and Transport sectors, are likely to be eligible under the R&D tax relief and receive a substantial benefit to boost their activities. 

Data and Software: A real Life Example  

One climate-focussed UK business in the data and software space which has benefitted from tax relief is Climate X.  

Climate X has developed cutting edge software that helps organisations understand how physical risk related to climate change impacts them, the R&D for which qualified for tax relief. 

The company’s software has been used by climate-focused businesses to understand all potential outcomes and quantify the financial impact of climate risks and opportunities for specific locations, properties, and infrastructure.   

Climate X engaged Apogee for their R&D tax relief application; Apogee were able to identify all eligible activities and qualifying costs, enabling Climate X to recover everything they were entitled to with minimum involvement.  

The relief they received was able to support the business’ growth, and helped fund further R&D.

That is what Climate X have said about the Apogee team;

“A great bunch of R&D specialists that quickly and efficiently helped us with our return.”  

How to unlock the benefits of R&D tax relief  

If you are a business that is developing new solutions or introducing technologies into internal processes to help combat climate change, you may be eligible for R&D tax relief.  

The schemes are available to businesses of all sizes, regardless of industry, which undertake qualifying R&D activities.  

If you’d like to find out if you could be eligible to benefit from R&D tax relief like Climate X, get in touch with Apogee for a free consultation on 07496 096 032 or via email at info@apogee.co.uk.  

1 Fighting Climate Change with Innovation (imf.org) 

In this blog, the funding experts Apogee Associates explore innovation in the UK’s Food & Drink sector, and how businesses can benefit from the R&D relief with their help.

Innovation and R&D in the UK’s Food & Drink sector

The food & drink industry is the UK’s largest manufacturing sector (bigger than Automotive and Aerospace combined) ^[1] with over £400 million in R&D expenditure recorded in 2020^[2].

Of the 101 food and drink businesses surveyed in April 2020 for leading accountancy and business advisory firm BDO’s, 79% stated that R&D and innovation are key areas of focus for them, particularly in automation, digitalisation, and new product development^[3].

With the rise of environmental concerns and Government plans to achieve a net zero economy, Food and Drink businesses are also focusing on reducing their carbon footprint.

Between 2019 and 2020, members of the Food and Drink Federation (FDF, the membership body for food and drink manufacturers) reported a 58% reduction in their CO2 output from manufacturing energy consumption and are working towards achieving net zero across the farm-to-fork supply chain by 2040.

The rise of the plant-based lifestyle

According to market research company Appinio, 63.5% of Brits bought vegan food items in 2021,^[4] while Ipsos found that plant-based alternatives to milk are used by 48% of British adults ^[5].

In response, 30% of businesses involved in BDO’s survey said they are investing in the development of new meat-free, vegan, and plant-based products^[6].

The war on plastic

With 82% of consumers surveyed by YouGov saying they are trying to reduce their plastic waste^[7], and nearly half admitting they would pay extra for more sustainable packaging^[8], this area of innovation could be vital for the survival and success of food & drink companies.

Following the introduction of the Plastic Packaging Tax in April 2022, development of sustainable alternatives is expected to skyrocket.

Mintel predicts that paper and board packaging will have the largest share of the food packaging market, projected at 54% for 2022^[9].

24% of BDO’s surveyed companies stated they are now investing in R&D to reduce plastic packaging and develop sustainable alternatives^[10].

However, the battle doesn’t end there; figures show that the environmental impact of food wastage far outweighs that of plastic packaging.

According to The Organisation for Economic Co-operation and Development (OECD), an international organisation which campaigns to “build better policies for better lives”, plastics emit 3.4% of global greenhouse gas emissions throughout their lifecycle^[11].

However, Our World in Data has found that 6% of global greenhouse gas emissions come from food wastage^[12].

The sector has a way to go to achieve Net Zero, but the FDF says its members are making strides in the right direction with a 30+% reduction in food waste each year since 2011^[13].

Are R&D tax credits an underutilised opportunity for food and drink businesses?  

Research & Development (R&D) tax relief is a government incentive designed to encourage and assist in the funding of innovation in the UK.

The HRMC-run scheme was introduced in 2000 and provides companies with tax relief for qualifying R&D activities.

The scheme allows companies investing time, money, and resources into developing new or existing products, services, or processes, to be rewarded with a tax reduction, rebate, or credit (cash).

By stimulating innovation, the scheme indirectly supports the UK’s economic growth, as qualifying businesses receive funds to allocate to further R&D activities, their supply chain, and job creation.

Despite billions of pounds being available for R&D support, so many food & drink businesses are failing to take advantage of tax relief by under-claiming or not claiming at all due to a lack of understanding of the system.

So, what are the benefits of R&D tax relief, who is eligible, and how can Apogee help?

How Food & Drink businesses can benefit from R&D tax credits

With 97% of UK food & drink businesses falling under the SME bracket^[14] for R&D tax relief purposes, a huge proportion of the sector could recover much of their costs through the incentive.

R&D tax relief can assist SMEs by supporting their R&D activities, helping them to enhance their competitiveness in the market, leading to growth, job creation, and improved cash flow.

The funds can also be utilised to reduce the environmental impact of food and drink companies, supporting investments in renewable energy sources such as solar panels, or a new manufacturing line for sustainable packaging production, as examples.

Which activities are eligible?

Activities that meet the definition of innovation and therefore qualify for the R&D tax relief schemes within the Food & Drink sector could include:

• Enhancing the nutritional value of existing products by removing allergens, food dyes and preservatives, or iterating the recipe’s formula to extend shelf life
• Development of novel ‘free from’ products
• Improving the efficiency of production processes, reducing operating costs and wastage
• Reducing the carbon footprint of products and manufacturing processes by developing sustainable packaging, or improving logistical operations through the development and integration of innovative IT systems
• Reacting to changes in regulation; ensuring products comply with new legislation whist preserving their taste and nutritional quality

Why I AM NUT OK considers Apogee the Big Cheese of R&D

Let’s consider Apogee client, I AM NUT OK, an artisanal cheese alternatives business born out of a need for a newly-vegan, cheese-loving Italian.

Background

American-born Angela Chou began crafting homemade alternatives to cushion partner Nivi Jasa’s transition to veganism as a cheese-loving Italian, right from their kitchen in Hackney.

The business

The couple turned their passion project into a thriving artisanal business, using trial-and-error processes to develop cheese alternatives that:

• Had the right properties to melt when exposed to heat
• Had a long shelf life
• Replicate the taste of dairy cheeses
• Replicate the texture of dairy cheeses

Eligibility

Their processes were a perfect example of innovation and an indicator of technical uncertainty, which meets one of HMRC’s eligibility criteria.

With Nivi and Angela having several years’ experience in the sector, the business ticked another box for eligibility.

R&D claims

Apogee’s R&D Tax Credit application support for I AM NUT OK has allowed the company to recover costs associated with:

• Salaries of staff working on R&D activities
• Utility expenses
• Materials utilised in the development and production of their products

Outcome

The funds recovered from HMRC through the R&D Tax Relief Scheme provided I AM NUT OK with a lump sum to reinvest in their business.

How Apogee is taking R&D Relief off the plates of Food & Drink Businesses

With funding available from HMRC, and support available from R&D experts like Apogee, potential for growth in Food & Drink businesses is vast.

Unlike many R&D providers, Apogee takes the burden of R&D applications off their customers’ plates, so they don’t have to spend hours filling in forms they don’t understand or trawling through financial data.

Apogee’s team of in-house experts are specialists at what they do; their refined process eliminates errors and ensures you recover everything you are entitled to!

If you’re unsure about your eligibility or need support with your R&D tax credit claims, Apogee can help.

To arrange your free, no-obligation consultation with one of Apogee’s experts, email jack@apogee.co.uk or come to visit us at the Bread & Jam Fest!

SOURCES:

^[1] Our Industry at a Glance 2022 (fdf.org.uk) Section 1, Paragraph 1

^[2] “Research and development expenditure in food, beverages and tobacco product businesses in the United Kingdom (UK) from 2002 to 2020” (statista.com)

^[3] BDO Food and Drink Report 2022 (bdo.co.uk) Page 19, Paragraph 2

^[4] Meat Alternatives Research UK (research.appinio.com) Graph 2 of 14

^[5] Almost half of UK adults set to cut intake of animal products (ipsos.com)

^[6] BDO Food and Drink Report 2022 (bdo.co.uk) Page 19, Paragraph 3

^[7] Most Brits support ban on harmful plastic packaging (yougov.co.uk) Paragraph 2

^[8] Most Brits support ban on harmful plastic packaging (yougov.co.uk) Paragraph 5

^[9] UK Food and Drink Packaging Market Report 2022 (store.mintel.com) Paragraph 4

^[10] BDO Food and Drink Report 2022 (bdo.co.uk) Page 16, Paragraph 5

^[11] Plastic leakage and greenhouse gas emissions are increasing (oecd.org) Paragraph 7

^[12] Food waste is responsible for 6% of global greenhouse gas emissions (ourworldindata.org) Paragraph 7

^[13] Our Industry at a Glance 2022 (fdf.org.uk) Section 4, Paragraph 2

^[14] Our Industry at a Glance 2022 (fdf.org.uk) Section 1, Paragraph 2

There’s been a lot of talk about changes to the R&D tax credit scheme over the past few months, both in the media, from politicians and HMRC. Consultations, advice from the House of Lords, last minute alterations and pulled proposals.

It has been a turbulent time, but the changes have now been introduced, as of the 1^st April 2023!

We want to cut through the noise to give you clear, accurate and up to date information on the changes, to make sure you have all the information you need on how the new R&D tax credit rules may affect your business.

A summary of changes

In this article, we will explain the following changes to the R&D scheme [1][2], which have now come into effect:

The net benefit

• Benefit ranges for SMEs, as a percentage of qualifying expenditure, have decreased from 18.85% – 33.35%, down to 8.6% – 26.97%
• R&D Expenditure Credit (RDEC) net benefit, as a percentage of qualifying expenditure, has increased from 10.53% to between 15% – 16.2%

The mechanism

• Qualifying Expenditure uplift rate for the SME scheme has reduced from 130% to 86%
• SME tax credit rate decreased from 14.5% to 10%
• New credit rate of 14.5% for R&D intensive lossmaking SMEs (who spend at least 40% of their costs on R&D)
• RDEC credit rate has increased from 13% to 20%

Administrative changes

• Companies with accounting periods starting after 1 April 2023 must notify HMRC 6 months after their year end of their intent to claim R&D relief
• All R&D applications must now be made electronically and supported by additional information substantiating the claim. From 1 August 2023, companies must complete a digital additional information form detailing the R&D activity and a breakdown of the expenditure claimed
• Companies must disclose whether they used an R&D agent to assist with the claim, and the details of which agent if so
• All claims must be signed off by a senior member of the business

For those who prefer numbers, we have produced the table below to give a summary of how these new rates affect businesses.

The following assumptions have been made in the table above:

• Profitable businesses with profits under £50,000 will pay Corporation Tax at 19% Corporation Tax, whilst businesses with profits over £250,000 will pay Corporation Tax 25%

• The above table assumes lossmaking SME businesses surrender their losses for a payable tax credit

• Qualifying R&D expenditure constitutes at least 40% of total expenditure for the R&D intensive businesses

Find out more about each of these changes and their implications below.

Previously announced SME uplift rate changes

In the Autumn Statement 2022, the government announced plans to adjust the SME incentive to reduce the rate for additional taxable deduction from 130% to 86%[3].

These changes have now been implemented and will affect any R&D expenditure incurred on or after the 1^st of April 2023.

The impact of these changes, alongside the changes to the credit rate (more on that in the section below) is an overall decrease in the benefit delivered by the SME scheme, with the range of benefits decreasing from 18.85% – 33.35% of qualifying expenditure, down to 8.6% – 26.97%.

Where a company sits in this range will depend on their tax position (how profitable or lossmaking they are) and what percentage of their costs are associated with R&D.

New credit rate for lossmaking SMEs

The new credit rate of 10% (down from 14.5%) for lossmaking SMEs announced in the Autumn Statement has been introduced [4].

This will effectively reduce the maximum benefit (the percentage of qualifying expenditure the company gets back) from 33.35% of qualifying expenditure down to 18.6%, with exceptions made for “R&D intensive” SMEs that are detailed below.

It has a significant impact on breakeven businesses who opt to surrender their loss for a cash credit, reducing the benefit from 18.85% of qualifying expenditure to 8.6%.

New R&D rate changes for lossmaking SMEs

There were some last-minute changes announced to the rates of recovery that will impact lossmaking “R&D intensive” SMEs[5]. This is a new concept introduced by HMRC that is based on the percentage of a company’s total costs that are associated with R&D.

HMRC are defining “R&D intensive SMEs” as businesses that spend 40% or more of their total expenditure on qualifying R&D expenditure.

Businesses that fall under this category will be able to claim a higher payable credit rate of 14.5% for qualifying expenditure rather than the new 10% credit rate for other lossmaking SMEs.

Put simply, the new maximum benefit for these “R&D intensive” lossmaking SMEs will be 27% of their qualifying expenditure figure.    

These changes came into effect for expenditure incurred on or after the 1st of April 2023.

Impact of new Corporation Tax rates

As confirmed in the Autumn Statement 2022[6], Corporation Tax increases have been brought into play, which (alongside the reduction in the uplift rate) directly impacts how the benefit affects profitable businesses.

This will now see companies with over £250,000 in profits paying Corporation Tax at a rate of 25%, while companies with profits under £50,000 will remain at 19%. Companies with profits between £50,000 – £250,000 will fall under a tapered rate between 19% – 25%.

What does this mean for businesses?

For an SME company earning less than £50,000 in profit, and therefore paying 19% Corporation Tax, that is receiving the benefit as a reduction in Corporation Tax, the rate of recovery will be 16.34%.

SMEs with profits over £250,000, and therefore paying 25% Corporation Tax, will see a rate of recovery of 21.5%.

Those SMEs under the tapered rate will receive between 16.34% – 21.5% depending on where they sit on this scale.

For any businesses applying for tax credits under RDEC, however, the benefit will range from 15% – 16.2% depending on the Corporation Tax rate the business pays. Businesses paying a higher rate of Corporation Tax will see a smaller benefit due to the taxable nature of the RDEC benefit.

R&D rate increases for RDEC

The RDEC rates have increased from 13% to 20%[7]. This change also came into effect for expenditure incurred on or 1^st April 2023.

This will be a welcome change to many businesses and will positively impact large companies, SME subsidiaries of large companies/groups, and SMEs that have received grant funding for R&D projects.

The government will also benefit, with this change elevating the UK’s R&D tax relief to become the joint highest uncapped rate within the G7[8].

The RDEC scheme has long needed a boost, and it is great to see this need has finally been met.

Overseas expenditure restrictions delayed

Plans for overseas subcontractor costs to be predominantly disallowed under the SME scheme have now been pushed back a year and is set to come into force in April 2024 instead[9].

What does this mean?

To recap, the government previously announced plans to greatly restrict the eligibility of overseas subcontractor costs, currently allowable under the SME scheme, effectively making overseas subcontractor costs ineligible to recover in most situations. The intent behind this change was to increase innovation and trade within the UK.

This would have meant that SMEs who currently subcontract innovation work overseas would be unable to recover the costs (with a few exceptions), limiting them to subcontracting work within the UK.

Initially, this change was proposed to come into force in April 2023, which would have been a considerable worry for many UK businesses with multi-year contracts. Fortunately, the introduction of this change has been delayed for another year, currently set to be introduced in April 2024.

What next?

Before April 2024, the government will consider how these restrictions may work alongside a potential merged R&D relief structure (more on that later).

Administrative changes

Several reforms within HMRC have been introduced following their proposal in the Autumn Statement last November (click here for more information on this).

These include:

• Requirements for digital submission of R&D claims
• Endorsement of R&D claims by a senior officer of the company
• Mandatory submission of supporting information to substantiate claims, including breakdown of expenditure.
• Requirement of notification of the intention to submit a claim with HMRC.
• Submission of details of any agent supporting with the claim

How will this work?

From 1 August 2023, the supporting information will need to be provided through an additional information form, which will be submitted digitally alongside the R&D application. This will set require additional detail on both the R&D activity and the associated expenditure, alongside contact details for the senior officer responsible for the R&D claim and any agent assisting with the application.

Whilst much of this information is already provided in R&D reports currently prepared, HMRC have stated that supplementary R&D reports can still be provided and can be useful to include additional information not requested on the form e.g. details of the competent professionals.

These reforms aim to target abuse of the R&D schemes and improve compliance. Specifically, HMRC state the changes will make it easier for them to prevent fraudulent claims and stop spurious R&D agents from operating in the space.

More on the potential merge of R&D relief schemes

In the Autumn Statement, the Chancellor announced the potential merge the SME scheme with the RDEC scheme[10], to create one unified R&D tax credit scheme for all businesses. He cited a wish to ensure taxpayers’ money is being spent as effectively as possible, whilst simplifying the R&D tax credit process. 

The government ran a consultation period for the proposition to merge RDEC and SME schemes between 13 January and 13 March. Apogee took part in this consultation to ensure our thoughts on how to improve the R&D scheme were heard and taken into account on our clients’ behalf.

What next?

The government is now considering the responses, and though no decision has been made just yet, a draft legislation is due to be published alongside the draft Finance Bill in the summer, along with a summary of responses submitted during the consultation period.

Summary

We’ve covered a lot in this article, so here’s a brief summary of each point discussed.

SME rate changes: The rate for additional taxable deduction (the uplift) has decreased from 130% to 86%.

Corporation Tax rates: Corporation Tax rates are now at 25% for companies with over £250,000 in profits; 19% for companies with profits under £50,000; and a new tapered rate of 19-25% for those with profits between £50,000 and £250,000.

R&D rates for lossmaking SMEs: The credit rate for lossmaking SMEs has been reduced from 14.5% to 10%. However, R&D intensive lossmaking SMEs can still claim a credit rate of 14.5%.

Rate increases for RDEC: RDEC rates have increased from 13% to 20%.

Overseas expenditure restrictions: Plans have been pushed back to April 2024, with no changes confirmed yet.

Administrative changes: Companies will now need to inform HMRC of intent to claim; R&D claims must be submitted digitally with endorsement from a senior member of the company; supporting information and details of agents assisting with the application must be provided.

Potential merge of R&D relief schemes: The government is considering responses from the two-month consultation period. We expect a decision to be announced in the summer.

We will of course update you on these situations when the government announces further information.

As your trusted R&D partner, Apogee’s focus is on providing you with the greatest benefit (net of fee) in the industry, paired with unmatched customer service.

Our team of experts are here to help you at every stage. If you have any questions or concerns about what we’ve covered in this month’s update, please do not hesitate to get in touch!

[1] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 5.52

[2] Spring Budget 2023 (publishing.service.gov.uk) Paragraph 4.51

[3] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 5.52

[4] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 5.52

[5] Spring Budget 2023 (publishing.service.gov.uk) Paragraph 4.51

[6] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 2.5

[7] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 5.52

[8] Spring Budget 2023 (publishing.service.gov.uk) Paragraph 3.74

[9] Spring Budget 2023 (publishing.service.gov.uk) Paragraph 4.53

[10] AUTUMN STATEMENT 2022 (publishing.service.gov.uk) Paragraph 5.52