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Inside CRATE Brewery: a spend of £123,000 identified over the past two years resulted in a saving of £30,000 on their tax bill

BUSINESS BUILDER: Making the most of R&D tax credits

There’s lots of deservedly enthusiastic chatter about innovation and experimentation in the craft brewing industry – but how well is understood that this ingenuity could be eligible for R&D tax relief? David Herd of Champion Accountants explains here how this tax relief works

Research & Development (R&D) tax relief allows SMEs to claim a tax deduction equal to £46 for every £100 spent on all qualifying expenditure. Whilst a great incentive, it is also surrounded by a lot of hesitation from eligible business - not through choice but more so due to lack of information.

Figures from HMRC show that only 17,135 SMEs claimed the relief in 2016. It’s a minute number when you consider that the UK is home to 5.4 million small and medium businesses.

Breweries and distilleries are often great candidates. Unfortunately, most don’t realise that they’re eligible for the government incentive, which can help to reduce the company’s corporation tax liability or result in a cash repayment on the money invested.

The type of activity that qualifies for R&D in the sector is vast. Businesses that invest heavily to boost their operations, services or products, be it through technology or new recipes, should really explore their eligibility.

A common misconception by many SMEs, not just breweries, is that R&D relief is about people in lab coats developing the next cancer busting drug. It’s so much wider than that in reality.

Most of the claims we handle actually come through our knowledge of a client’s business rather than them approaching us directly – simply because they don’t consider what they do to be innovative or unique.

When it comes to breweries and distilleries, R&D tax relief is often claimed by companies that solve issues or challenges within their business through developing new products or improving existing methodologies. Examples include:

* New flavour combinations or enhancements
* New guest or special beers
* Reducing or increasing sugar or alcohol content without impairing the flavour
* Increasing a product’s shelf life
* Increase efficiency or yield e.g. modified equipment, new bottle designs or keg filling techniques
* Developing new software.

The costs that qualify for the relief include wages, ingredients, overheads and software, as well as the ability to claim cash back from HMRC. Any loss-making businesses that are yet to make a profit can claim £33 for every £100 invested in R&D activities.

First time claims can also include R&D spend over the last two financial years. For example, a brewery with an accounting year ending on 31 December 2015 has until 31 December 2017 to submit a claim.

What should a brewery consider?

First and foremost, we always encourage our clients not to be nervous about making a claim. R&D relief isn’t a tax planning scheme. If they’re performing R&D work they’re entitled to claim relief.

R&D need not be the development of a completely unique product to the marketplace. You can have a similar product to another brewery, but if you have implemented your own unique methodology of how to manufacture that product, then your work can still qualify.

If you’re unsure about whether what you do qualifies, find yourself a good R&D advisor who can explain the criteria to you. They may take a percentage of the tax saving but they’re experts in this field and can save you thousands in tax for what you do on a daily basis.

A few considerations that claimants need to be aware of from the get go are:

* The rate of relief available differs if the work is completed by sub-contractors and not employees. For sub-contractors, it’s reduced to 65% of the invoice paid, which could be a significant difference to 100% of a salary.

* Breweries that pay their director’s dividends should also consider whether these are the most tax efficient option. Dividends do not qualify for R&D relief, so be sure to weigh up the benefits of dividends vs R&D salary.

* Businesses should also consult with their advisors before accepting government grants, whether that’s EU or UK wide. This type of funding can disqualify an entire project from being eligible for R&D relief, which is often greater than the grant itself.

Lessons learned at CRATE Brewery

East London’s CRATE Brewery produces 5,000 hectolitres of beer annually, runs three retail bars and is constantly evolving and updating its own-brand recipes with tweaks, trials and experimental brews.

With the CRATE team having a vague understanding of the tax relief available and the benefits it would bring, advisors at Champion Accountants helped them to identify a spend of more than £123,000 on R&D activities during the last two tax years, which resulted in a tax saving of more than £30,000.

CRATE Brewery director Jess Seaton says, “The claim couldn’t have come at a better time for the business. We were in the middle of a large expansion, so it not only saved us money but made us more aware of how to make the most of our innovative brewers and how we produce the beer.

“We have always been very active with research and development, every day and with every brew, and R&D tax relief is another added bonus of us continuing to push the boundaries!”

The tax relief available can amount to a generous sum but it’s crucial that businesses make a claim that meets HMRC requirements. Appointing an experienced R&D tax advisor, which doesn’t have to be your accountant, will ensure that the claim meets the necessary criteria and will also help you to identify any other areas that you may not realise qualified for R&D, helping to maximise the R&D relief available.

The author, David Herd, is a tax planning advisor at Champion Accountants. The firm specialises in R&D tax relief, recently hitting £15 million in claims made on behalf of clients - with a 100% success rate. Free consultations to determine whether a project might be eligible for R&D tax relief usually take around 15 minutes.

For more information, contact David Herd at Champion Accountants, telephone 0161 703 2500 or by email: david.herd@championgroup.co.uk

29th September 2017

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