It is no secret that, similar to other areas within the food industry, the bakery sector is fuelled by consumers looking for new product and packaging choices.

In addition to consumer pressure, manufacturers must comply with regulatory bodies, such as the UK Food Standards Agency and the Food and Drug Administration.

As a result, manufacturers continually reassess product formulations, baking processes, packaging materials and equipment in order to improve product performance, enhance overall efficiencies and remain competitive.

The UK government is offering an incentive by way of additional tax relief - and it is likely that some of these activities will be eligible for that incentive. Research and development (R&D) tax relief is available to any UK firm that is carrying out qualifying activities.

Yet many people overlook this valuable incentive because they do not realise just how broad the definition of R&D is for these purposes; it’s not all about white coats and Bunsen burners!

Large companies can go back to 1 April, 2002 to make claims, while smaller companies can go back six years. However, time is running out. The government has now reduced the time limit for making historic R&D tax relief claims. From 31 March, 2006, companies will only be able to claim historic R&D tax relief going back two years instead of six. For accounting periods ended on or before 31 March, 2006, all claims have to have been made by the earlier of six years after the accounting period or by 31 March, 2008. For those that have yet to make a claim, this could see them potentially miss out on millions in possible tax relief.

== ways to claim ==

There are two basic systems under which firms can claim: Small and Medium-sized Enterprise (SME) relief and Large Company relief.

There are considerable benefits to companies in claiming R&D tax relief, yet many food manufacturers let their R&D tax relief entitlements pass. In 2004, according to the Office of National Statistics, the food, beverage and tobacco product manufacturing businesses dis- closed R&D expenditure representing only 0.0251% of the total R&D expenditure across the manufacturing sectors. It is clear, having provided services to a number of R&D tax relief claimants in various UK food manufacturing companies, that most businesses are under-claiming because of a lack of understanding about the incentive.

One key misconception is that eligible R&D activities occur only in a laboratory setting, a mistake that leads many manufacturers to only claim activities that take place in their R&D departments. This is a major oversight, as there are many other projects that may involve qualifying R&D activities. These can include scale-up to commercial production volume, process improvements, equipment upgrades or improving existing products.

Manufacturers who rely on their overseas parent companies to perform R&D also often assume that there are no eligible R&D activities in the UK plant. This is not always true, as products and process developed in overseas associated companies for manufacturing in a UK plant frequently need to be adapted to be successful in local markets. This is often due to ingredient or process variability. Therefore, the activities in the local market, undertaken in the UK plant to adapt the process or formulation may be eligible to receive R&D tax relief.

A summary of the different phases of product/package development in food is presented above, along with possible activities under each section. The boxes shaded in orange represent where eligible R&D activities may be found. In all cases, the key consideration in determining whether a project qualifies is whether or not the eligibility criteria have been fulfilled. The company must demonstrate that the work was technically challenging and an advance was being sought. Advances in science or technology can include new or improved products, processes, materials, devices, services or software.


While there are differences in eligible qualifying expenditures for a large company compared to that of Small and Medium-sized enterprise (SME), qualifying expenditure generally includes:

l R&D staffing expenditure: qualifying expenditure on externally provided workers;

l subcontracting and/or third-party payments to research institutions or universities (in some cases);

l and materials consumed or transformed, including water, fuel and power used in the R&D activity.

If your firm is already claiming R&D tax relief, you may want to consider whether all eligible activities are being claimed. One area often overlooked involves situations in which UK affiliates are receiving funding from the non-resident parent corporation to carry out R&D in the UK. Often, the UK affiliate does not claim the R&D costs, on the grounds that they were fully funded. Yet under the R&D tax relief incentive, non-resident funded R&D costs may still be eligible. In general, most businesses can benefit from structuring their accounting system to capture all the qualifying costs.

* Naro Roxane Markarian is manager, research and development tax team, at KPMG in the UK