R&D Tax Relief for a Regional Baker
Our client is an owner-managed business involved in the production and sale of bread, sandwiches and other confectionery. During the period in question, the company had won a substantial contract to supply bread and other baked goods to a supermarket chain within the region.
The company had not previously considered preparing an R&D Tax Relief claim, as they did not consider that their activities would qualify. However, winning a substantial new contract resulted in them having to develop new products and production methods.
The contract with the supermarket required the company to produce bread on a substantially larger scale than previously. Indeed, the production volumes made it unfeasible to simply bake the goods on the company’s traditional night shift. A new method of production had to be devised that allowed for the dough to be mixed substantially in advance of baking without any reduction in quality of the final product.
In addition, the supermarket required the company to produce a ‘value’ range of goods which needed to be priced competitively and have a longer shelf life than the client company’s premium, freshly-baked product.
In both cases, the product specification needed substantial change from the products already being produced. New recipes and production techniques had to be devised and implemented. In order to maximise the potential claim, the challenge was to identify which part of the process properly constituted R&D activity, as opposed to simply baking a different product.
We conducted an appraisal meeting with the company’s key managers to discuss various changes that were required to recipes and production techniques resulting of the new contract. We were able to identify the start of the projects and the point at which research and development ended.
Once the full extent of the qualifying projects had been identified, we then worked with the company’s finance team to identify the relevant expenditure on the projects. As is often the case, the company’s otherwise exemplary financial records did not explicitly identify R&D expenditure.
Our approach was to work with the finance team to establish what information was available and then devised a way to reasonably apportion costs to the relevant projects in a way that was supportable, should HMRC question our conclusions.
The claim resulted in a tax repayment to our client of £25k.