Can you really claim R&D Tax Credits for a new blueberry flavoured croissant?

Many small business owners have been vaguely aware of the existence of R&D Tax Credits for many years but thought that it didn’t apply to them – and for good reason.

To be eligible for R&D Tax Credits, a project must be both (a) seeking an advance in science and technology and (b) involve overcoming uncertainty. Many projects will involve uncertainty, however seeking to achieve a genuine, systemic technical or scientific advance is much rarer in small businesses, especially when the bar set by HMRC is high:

?"Projects must aim to create an advance in the overall field, not just for your business. This means an advance cannot just be an existing technology that has been used for the first time in your sector.”

Even HMRC’s view of technical uncertainty is more stringent than many believe:

“Scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done.”

Yet some companies in the R&D advisory field have imaginatively interpreted the rules to such an extent that they maintain virtually all companies are eligible for R&D Tax Credits.

It is certainly true that many SMEs, particularly in industries such as engineering and manufacturing, have been undertaking genuine R&D but failed to realise that their activity would qualify for R&D Tax Credits.

From around 2007, an increase in “outreach” by HMRC inspectors to raise awareness of the R&D scheme was combined with a growing confidence in submitting R&D claims by non-technical accountants who spotted the large contingency-based fees earned by some of the specialist R&D advisors and didn’t want to miss out on a potentially lucrative revenue stream.

As the number of obvious candidates not yet claiming R&D Tax Credits reduced, R&D advisors and accountants increasingly promoted the idea that R&D Tax Credits are “not just for men in white lab coats.”?This is a typical example from the website of one R&D advisor:

?“Usually the terminology ‘Research and Development’ can make business owners think that it is only scientists in white lab coats who qualify – that is not the case. Truth is, 90% of companies that qualify for tax credits are failing to make a claim.”

A quick Internet search reveals dozens of references to R&D being “not just for men in white lab coats". Whilst being superficially correct, I believe this statement has become counterproductive as it has encouraged a massive increase in spurious R&D claims.

When the subject of R&D Tax Credits is raised at networking events or conferences, business owners can often be seen chuckling together, boasting about the absurd “R&D” projects they managed to slip past HMRC, egged on by their local accountant or ambulance-chasing R&D advisor.

Sweeping and unverifiable statements made by R&D advisors such as "only 5% of eligible businesses claim R&D Tax Credits" and "billions of pounds of funding goes unclaimed every year" have driven a large number of new entrants to the R&D advisory market – resulting in a massive annual increase in the number of claims being submitted.

I have heard chartered accountants confidently state that "every company should be claiming R&D Tax Credits" and I have written before about one of the UK’s biggest R&D advisory firms which maintained that 57% of the UK’s 3.5 million SMEs apparently qualify for R&D Tax Credits, meaning that HMRC could expect an additional 2 million SME claims per year.

Some of the companies that are supposedly eligible are highly unlikely to be undertaking R&D, with sectors targeted including dentists, care homes, local builders, restaurants, cocktail bars – and even high street bakeries.

Which brings us to the blueberry flavoured croissant.

I came across the tale of the blueberry flavoured croissant R&D project in an interesting article written a couple of years ago by Brian Cookson.

Brian gives a potted history of the UK R&D Tax Credit scheme, which he found followed a similar trajectory to other countries who developed similar R&D incentive schemes, most notably Canada which had a 15-year head-start over the UK.

As HMRC's oversight of the UK R&D regime became more relaxed, an increasing number of speculative claims were nodded through which contained projects that were essentially ineligible.

As Brian says, word soon gets around and stories start circulating that companies are filing R&D tax credit claims with little R&D work, such as “I heard a high street bakery filed an R&D Tax Credit claim for developing a blueberry flavoured croissant.”

A local high street bakery would be unlikely to be able to claim R&D Tax Credits for developing a new blueberry flavoured croissant. In fact, HMRC has long-standing doubts about whether food-related projects qualify as R&D.

In an enquiry letter sent to a food manufacturer, HMRC clearly set out its position that:

“It is not sufficient to demonstrate that you resolved problems associated with food production.”

HMRC is looking for evidence of how the way in which the problems were resolved represent an advance in the previous technological capability in the food industry, as well as showing that what was done materially affects the underlying science or technology.

To be eligible, a high street bakery would have to be seeking a clear advance in food science, which a small-scale operation would be unlikely to be doing.

On other hand, a large food manufacturer may be able to make an R&D claim if they were seeking an overall advance in food production which involves the underlying food chemistry.

The scaling-up of food production on an industrial scale involving the thermodynamics of baking in large ovens might also be an area for R&D but again, almost by definition, such activity would not be taking place in a high street bakery.

The idea that small businesses such as a local bakery can claim R&D Tax Credits has emerged largely due to the growth in the number of R&D advisors who promote the idea that virtually every company should be making a claim.

I would hazard a guess that some high street bakeries have made R&D claims and that these have slipped through unchallenged by HMRC however, things are about to change.

As I wrote in a previous article, HMRC has recently recruited an additional 100 inspectors to the R&D team, and it now has the capacity to open many more enquiries into R&D claims than in previous years.

The days of a high street bakery submitting a spurious R&D claim for what HMRC would consider as “just cooking” are now over.

With these increased levels of HMRC scrutiny, it is now vital that companies collaborate with a specialist R&D advisor who employs technical staff to qualify and define that R&D is taking place.

Rufus Meakin is a long-standing business development expert for R&D Tax Credits and a passionate believer in raising standards across the UK R&D claims industry.