Food & Drink Insight. Edition 1, 2021

Food & Drink. Edition 1, 2021

Adapting to COVID -19: Is your glass half full or half empty?

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Financial experts, fuelling ambition

Getting a slice of the Mergers & Acquisitions (M&A) pie

Turning your waste into profit

The latest VAT-related issues impacting the Food & Drink sector

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Welcome

“If anyone can re-emerge from this crisis stronger and fitter, it’s the region’s food & drink industry.”

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Food & Drink Insight Edition 1, 2021

Welcome

The Government’s new Recovery Loan Scheme has replaced Bounce Back loans and the Coronavirus Business Interruption Loan Scheme, but Research & Development (R&D) tax credits are another source of Government funding that have historically been overlooked by the food & drink sector.

There’s no way of getting round it; the South West’s food & drink industry has had to endure a torrid 12 months or so.

This has undoubtedly been the worst crisis that the region’s hospitality sector (in particular) has faced in living memory but, finally, there are grounds for optimism as the country begins to take its first tentative steps back to ‘normality’.

People are, at last, looking forward to enjoying eating out once again or enjoying an al fresco craft beer, a local cider or an artisan G&T… simple pleasures that we have all missed during lockdown.

This latest edition of Food & Drink Insight is a celebration of what’s great about this sector that we’re all proud to be part of.

We explore the exciting new Food Works SW technology and innovation centre near Weston-super-Mare as well as discuss some of the benefits of B Corporation status for food & drink firms.

The pandemic has been the catalyst for a surge of Mergers & Acquisition (M&A) activity across the sector so we examine how owner-managers can maximise the value of their enterprise.

Food waste and sustainability are hot topics so we consider how waste can be turned into profit by adopting a mind set that puts waste management at the heart of your business.

We also provide you with an in-depth round up of the latest VAT-related issues impacting the food & drink sector as a result of the pandemic and the end of the Brexit transition period.

And, finally, we take a look at how cloud accounting can help business owners to better understand their data which was a real gamechanger for many firms during COVID-19.

Our food & drink businesses have been amazingly resilient in that they’ve had to do more than simply adapt, they needed to transform themselves and, in many cases, reinvent themselves in order to keep going… and, for me, it’s been inspiring to see how businesses across the entire supply chain have collaborated together to overcome these challenges.

The hard work is by no means behind us but if any sector can re-emerge from a crisis such as COVID-19 stronger and fitter, it’s the region’s food & drink industry.

Phil Mills Head of Food & Drink

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Contents

06 Your Old Mill Contributors Phil Mills, Head of Food & Drink 07545 642087 phil.mills@om.uk Lorraine Bolland, Director 07817 491732 lorraine.bolland@om.uk

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Lucy Bennett, Adviser 01935 709320 lucy.bennett@om.uk Ashley Harvey, Adviser 01935 709391 ashley.harvey@om.uk Tony Hawes, Chartered Financial Planner 07854 413809 anthony.hawes@om.uk Marianne Hawksworth, Senior VAT Manager 07527 423430 marianne.hawksworth@om.uk Mark Neath, Corporate Finance Director 07825 620049 mark.neath@om.uk Aisha Perrott, Research & Development (R&D) Specialist 01935 709427 aisha.perrott@om.uk

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Food & Drink Insight Edition 1, 2021

Contents 06 Adapting to COVID-19:

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Is your glass half full or half empty?

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26 Guest Spot: Baboo Gelato: No Purchase Cashback Research & Development (R&D) tax claims - are you missing out?

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Financial Planning for F&D business owners Turning your waste into profit Understanding your data

30 The latest VAT-related issues impacting the Food & Drink sector

B Corporations: The business model with a conscience Guest Spot: Food Works SW Getting a slice of the Mergers & Acquisitions (M&A) pie

20 Guest Spot: Taste of the West

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Adapting to COVID-19: Is your glass half full or half empty?

Adapting to COVID-19: Is your glass half full or half empty?

Some people say the glass is half empty. Some people say the glass is half full. I put myself in this category – the eternal optimist.

You see if you know your glass is too big you can do something about it.

You can choose a different glass – one that fits perfectly. Or you could put more in your glass (something I’m in favour of at a personal level). The point is you have options because you understand what you’re looking at.

I think it would be fair to say that 2020 didn’t pan out like most people thought it would do. The optimists amongst us will see the positive changes that have emerged – the widespread (enforced) adoption of the virtual meeting, the realisation that we could live without jumping in our cars at every possible moment, the reacquaintance with our local area and the great outdoors. They would be right of course.

The pessimists will point to the injustice of it all. The economic hardship, the rewriting of our civil liberties etc. They would also be right of course.

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But the pragmatists will have been carefully observing, deliberating and ultimately formulating a plan that simply and effectively deals with the situation in the way that they see best. More on that shortly. First some context.

Impact on the food and drink sector Fortunes for food and drink businesses in the pandemic have been mixed as in no other sector.

Take the supermarkets for example.

With £11 billion of sales, November was the biggest month ever for grocery sales – an impressive logistical feat given the various restrictions on movements throughout the country and internationally. Indeed, there are numerous success stories at a local level too. We have seen butchers turnover as much in a week as they

Food & Drink Insight Edition 1, 2021

“Fortunes for food and drink businesses in the pandemic have been mixed like in no other sector.”

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Adapting to COVID-19: Is your glass half full or half empty?

have done in 52 weeks previously and demand for basic ingredients such as fruit, vegetables, flour and eggs soar.

But consider some other trends. Kings College reported in 2020 that nearly a third of the public were drinking more alcohol than usual – ‘great news for the alcohol producers’ I hear you cry.

Well not if you’re a brewery selling 90% of your beer to local pubs and restaurants. Likewise, wholesalers and distributors, almost wholly dependent upon our appetite for a drink and a meal out, may not steal the headlines as the restaurateur has but they too have seen their market completely evaporate with every new lockdown or Government restriction. That’s before we think about the pubs and restaurants themselves.

With this context it’s understandable that one’s ‘glass half - perspective’ may well be shaped by the almost

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bingo like effect of coronavirus that has seen some turned into winners but left many wishing their business was a game they had never played.

Despite the seemingly arbitrary way which you have been dealt your hand I believe your ‘glass half – perspective’ is more important now than ever.

Being an optimist or a pessimist doesn’t get you very far. But instead understanding the situation you face and adapting what you can do does make a difference. We have seen this in reality…

How local businesses are adapting Georgie Porgie’s Puddings are a great example of this. Historically, the business has relied upon turnover from Christmas markets. Recognising that with the pandemic up to 60% of his sales were likely to evaporate,

founder, George Hollywood bravely commenced, and invested heavily in a social media campaign to drive online sales as never before. The result: sales figures that look set to beat the previous year and a retail platform that could underpin the future success of the business.

This isn’t of course an isolated example. We work with another business in the wholesale market SJ Berisford. At the start of lockdown, in March 2020, two months of trading were almost completely lost. But by tweaking the business model and offering one or two additional basic products not previously carried and underpinned by a complete commitment to the quality of service, this business was able to win multiple new accounts. The result: a 12-month trading performance that would leave you wondering whether there

Food & Drink Insight Edition 1, 2021

had been any interruption from the pandemic.

Planning a more positive future

Throughout the food and drink sector we’ve seen stories of success, right the way through to hospitality. The White Post in Rimpton quickly adjusted their model at the height of lockdown and built a huge weekly following for their takeaway service and in doing so reached new markets and enhanced the reputation of one of the best gastro pubs in the South West, whilst reducing costs to trade as profitably as possible.

Part of making the right decision comes from an acute awareness of the financial situation and the financial consequences of your decision. An accountant can help with this, providing the tools and the expertise to guide your thinking. This should provide the foundation for your decision making and if you don’t have this then you can’t even see the glass.

In each case, the success of the venture was dependent upon understanding what each business was faced with. Did the glass need topping up? Or was a smaller glass required?

Phil Mills Head of Food & Drink 07545 642087 phil.mills@om.uk

But each of these businesses have made brave decisions to change the future and in my view plenty more of that will be needed to make sure the glass is full in 2021.

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Guest Spot: Baboo Gelato: No Purchase Cashback

Guest Spot: Baboo Gelato: No Purchase Cashback - retailer slams Government proposals as unfair and unworkable This article was originally published by Forbes Advisor on 4 September 2020

Last week the Government announced plans to allow customers to request cashback in shops without having to make a purchase.

This is in response to a dramatic acceleration in the decline in cash usage during the coronavirus pandemic something which threatens to leave many in society at a disadvantage as they do not or prefer not to use digital payment methods.

But while the desire to meet the needs of groups such as the elderly and vulnerable has been lauded in many quarters, some retailers have voiced concerns about the proposal.

One such is Sam Hanbury of Baboo Gelato, a chain of three ice-cream shops in Dorset, which he runs with his wife Annie. He told Forbes Advisor UK: “It is unclear whether the Government is proposing that we would have a mandatory duty to offer cashback without a purchase, or it is simply an option for us to do so?

“If it were mandatory, we would be fiercely opposed, as we do not keep cash in our kiosks overnight, and the last thing we would want is to have large amounts of cash required to be kept on site.

And how would it work? If it were mandatory, would a shop be breaking the law if they were not able to offer cashback?

Would there be a sliding scale depending on the size of the shop? Or a limit to the amount of cashback a customer could demand?

For example, if we had three people in a row asking for £50 cashback, we would be wiped out of cash, so would we be

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expected to hold £100s on site just in case anyone asks?

Because this would put our staff and our site at risk.

We have been working hard to reduce our cash usage, but progress had been slow until Covid-19 which has had a huge and immediate impact. For example, in our Lyme Regis shop, our total cash take as a percentage of sales fell from 71% in 2019 to 19% in 2020.

This is largely in response to Covid restrictions and the general move away from handling cash, but we think it is a permanent shift, and we would like to go entirely cashless in time. The advantages are enormous and include no cash on the premises, which means no temptation for staff and greatly reduced risk of robbery, as well as ease of reconciliation, and the general time wasted counting, collecting, depositing cash and change.”

No one will be excluded “In terms of excluding certain customers who don’t have other payment options, we do still accept cash and will continue to so that we don’t exclude anyone.

Offering cashback without a purchase as a way of supporting people who can only use cash is completely illogical because, to get cashback from a shop, you need to have a card. And if this is about unbanked people then offering cashback without a purchase is not the answer either. The decline of cash and the issues this poses to those

Food & Drink Insight Edition 1, 2021

“We would like to go entirely cashless in time.

The advantages are enormous.”

not having to cash up at the end of each day, as well as reducing the time it takes to serve customers.

who don’t have access to cards is a moral and cultural problem and needs far more thought than mandating that retailers have to offer cashback. In my mind, the Government is taking a backwards step here. Use of cash is declining for a reason – because it is easier and safer to use cards so, if we are mandating anything, it should be that all shops accept cards, not that all shops offer cashback.

Kevin Pratt Forbes Advisor UK Staff

Mandatory cashback is not the answer, and as the Government seeks views from retailers on its proposals, I think it will become clear that there will not be a huge amount of support for the idea.”

The benefits of businesses being cashless Phil Mills of business consultants Old Mill added: “Businesses, particularly those in the hospitality sector, that have transitioned to operating purely on a cashless basis are benefiting in obvious ways such as the time saved in

There are also ancillary benefits such as reduced insurance costs in not holding cash on premises, so any change towards mandating cashback payments without the need to make a purchase clearly needs to be properly worked through.”

Kevin Pratt is the UK editor for Forbes Advisor UK. He has been writing about all aspects of household finance for over 30 years, with a particular focus on insurance and energy.

Finances can be complex and challenging, so he’s always striving to provide accessible information that will help readers make good choices with their money.

About Forbes Advisor: Forbes Advisor is a trusted destination for unbiased personal finance guidance, news and reviews, dedicated to helping consumers make smart financial decisions and choose the right financial products with ease.

Reprinted with permission from Forbes Marketplace Operations, Inc. © 2020 Forbes Marketplace Operations, Inc. All Rights Reserved.

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Research & Development (R&D) tax claims - are you missing out?

Research & Development (R&D) tax claims - are you missing out?

As the nation’s economy begins to recover, the Treasury is seeking to encourage investment in innovation as part of a package of measures designed to stimulate future growth.

Whilst eye-catching giveaways like the ‘super deduction’ scheme have caught the attention of businesses but established incentives like Research & Development (R&D) tax credits have long been available.

All too often, it appears that many food and drink businesses regard the effort that goes into solving a technical problem as just part of routine, day-to-day activity and this way of thinking means that they’re consequently overlooking a valuable Government incentive that could make a real difference to cash flow.

You don’t need to be working in a lab to be undertaking R&D. You don’t need to be mixing lots of potions together.

You definitely don’t need to be inventing rockets to fly to Jupiter!

You could be undertaking R&D if you undertake research and testing that goes beyond the ordinary method of resolving an issue. What’s more, it doesn’t even need to be successful.

Old Mill can help by preparing a claim with you, meaning you could receive total tax relief of 44p for each £1 spent.

Claims in the food and drink sector The scope of claims can be very broad from product and manufacturing

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innovation to new advancements in areas like IT and distribution. Here are some examples of eligible claims in the food and drink sector: • Replicating an existing product but making it dairy free, egg free, vegan etc • Creating a new innovative process • Creating a product that is lower in fat than existing products, but with the same great taste • Research and testing undertaken in order to extend shelf life • Creating a means of making a product using substantially less sugar, salt etc • Creating bespoke packaging solutions, for example recyclable packaging • Adapting an existing fridge ready product to be kept in the freezer, with the end result still being suitable for consumption • Bespoke tailoring of equipment in order to suit proprietary processes • Creating products without use of preservatives and additives that are still suitable for consumption after x amount of days • Trialling fat/protein contents to ensure the ingredients don’t separate/ negatively react.

Qualifying costs There are a range of costs that can potentially qualify for relief such as:

• Staff costs for staff working directly on the project (this includes employer’s pension contributions, employer’s national insurance contributions, and even reimbursed travel expenditure)!

• Staff costs for those supporting the R&D project • An element of the R&D subcontracted out by the company • Enlisting the help of another worker (for example through an agency) to help with your R&D project • Materials consumed in trials, tests etc • Repairs to machinery used in R&D • Light, heat and water used • Software used in the projects.

In addition to the above, if the whole (or even part) of a building or machinery is bought or constructed in the year and is used for R&D, a proportion of this could be claimed too.

There are limits on the maximum amount that can be paid into pensions so you should take advice before making third party pension contributions.

How Old Mill can help We help many of our clients put together successful R&D claims year after year. What makes us different

Food & Drink Insight Edition 1, 2021

is that we work with you from the beginning of your claim right to the end. We get to know you and your business, and we talk with the individuals who worked on the projects in order to maximise and submit a robust claim to HMRC. We want to make sure we save you time so that you can focus on running your business.

Our team of experts know what HMRC expect to see, and so we know what to ask your experts. We update you on the progress of the claim at every step of the way and produce a report at the end. We also make recommendations on anything else you can be doing to improve your future claims, systems or processes.

Next steps Sounds good? Then get in touch now for a free, no obligation chat with one of our experts, and let us handle your R&D tax relief claim while you focus on running your business.

Aisha Perrott Research & Development (R&D) Specialist 01935 709427 aisha.perrott@om.uk

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B Corporations: The business model with a conscience

B Corporations: The business model with a conscience In 2006, B Lab, a not-for-profit organisation founded in the US set out on a mission to solve social and environmental issues through the power of business. They saw their vision achievable through B Corporation certification.

Fast forward to 2020 and, at the time of writing, 150 industries have embraced B Corps, with more than 3,600 for-profit businesses spanning 74 countries, including the UK. Successful B Corps include household names such as Ben and Jerry’s, Innocent Drinks and Danone.

These businesses have chosen to diversify their attention beyond the traditional key stakeholder: The Shareholder.

By obtaining B Corp status, these businesses have had to develop objectives that provide a more concerted approach towards the needs of other stakeholders, such as employee satisfaction, community development and environmental sustainability.

It’s clear from the increasing public desire for improved social and environmental development, that this diversification of objectives doesn’t have to be to the detriment of shareholders. B Corp certification can act as a springboard to improved commercial and operative success for those business owners who are genuinely committed to making their model a more socially responsible one.

Is this the model for (S)ME? For small and medium businesses, putting social and environmental responsibility at the forefront of your business model could be seen to take away from other aspects of the business that are crucial to their success and growth.

However, by obtaining B Corp status, many companies have seen that traditional business objects work in tandem with

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their passion for improving the world in which they operate.

Turnover growth According to research from B Lab, average growth for UK B Corp entities was 14%. This is further backed by research published in October 2020 from Gwent University, which also suggests that short-term turnover growth as a result of gaining B Corp status is 22% on average.

Turnover growth can be largely linked to the growing popularity of sustainability. After all, 66% of consumers are reported to be willing to pay more for socially responsible goods and services.

It’s clear then that social responsibility, especially sustainability, gives your products a competitive edge that, coupled with the growing discourse on environmental issues, can make your brand more attractive and, therefore, more successful.

Financing opportunities This attractive brand isn’t just noticed by the consumer.

It has a knock-on effect on the investor too. There is an ever-growing community of investors who are looking to join companies that fit in with their ethos of sustainability. That is why most mainstream investment platforms are now offering socially and environmentally sustainable funds.

For those B Corps that are SMEs, this can help break down barriers to obtaining funding from external investors,

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“ This attractive brand isn’t just noticed by the consumer. It has a knock-on effect on the investor too.”

enabling them to double down on the growth seen from having a socially responsible brand.

Therefore, with a better capital backing, and impressive financial results and forecasts, a B Corp will likely be a better candidate for obtaining bank funding, providing more opportunities to make those key investments and grow the business.

Employee growth and retention However, the benefits of becoming a B Corp aren’t solely on the balance sheet. The status can attract (and retain) the right people, providing businesses with a larger pool of skills and experience to help grow the business. This is evidenced by the Gwent University study which states that as a result of achieving B Corp status yearly employee growth is 13% on average.

Corporate responsibility is clearly playing a larger role in influencing where people want to work. Finn Tribe who works for B People, a recruitment agency specialising in recruiting for B Corps, states;

boxes. B Lab’s completion guide for SME’s quotes the process as being ‘rigorous’, which they state is what gives the accreditation its value. They go as far to say that most companies don’t achieve their accreditation on their first try.

Broadly, there are three key steps in obtaining certification: 1. Completion of the B Impact Assessment (BIA) – a tool designed to measure your business’s social and environmental impacts. The key areas assessed are Governance, Workers, Community, Environment and Customers. To progress from this step, your company must reach a verified score of 80/200 2. Your business must then meet the B Corp legal requirements relating to your business structure 3. Once finalising and submitting your application you will be invited to a rigorous virtual review call to discuss and assess your application and documentation.

‘The recruitment benefits for B Corps are largely threefold’:

Upon certification, your business will have B Corp status for three years. In addition to this, there is an annual fee which starts from £500 per year and is scaled up based on turnover.

1. The employee is likely to be engaged with your overall ethos and branding;

Make sure you’re in it for the right reasons

2. The employee benefits that B Corps provide are attractive in their own right; and 3. The transparency, openness and autonomy of B Corps enables the individual to make a difference’.

It’s no secret that great people are attracted to great businesses, but B Corps take that additional step by aligning a great business with greater employee benefits and engagement, making them far more attractive to potential new recruits.

Are you ready to take the plunge?

Although there are clear benefits, becoming a B Corp shouldn’t be seen as a free ride to success. Business owners who want to become a B Corp need to make sure they’re ready and willing to meet the requirements.

Achieving the certification is not just about ticking a few

The key thing to remember in becoming a B Corp, is that it isn’t just another strategy – you’re actually joining a community of business owners who believe that they can help solve the many social and environmental problems we face today by using their business. Yes, there are indirect benefits in becoming a B Corp, but these should be looked at as a bonus to the real reward of becoming socially responsible. Before taking the plunge, you need to assess whether B Corp status fits in with your company’s ethos and, crucially, you need to ask yourself: if signing up doesn’t bring you the benefits listed above, would you still be willing to try and make a difference? Only then can the benefits of becoming a B Corp become unlocked.

Ashley Harvey Adviser 01935 709391 ashley.harvey@om.uk

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Food innovation and optimisim in the South West

Food innovation and optimism in the South West Weston-super-Mare might not strike you as the food innovation capital of the South West but, thanks to the purpose-built Food Works SW food tech and innovation centre, that’s what it’s fast becoming.

Just south of Bristol, this food and drinks industry hub is just a few minutes’ drive from J21 of the M5 – and it’s open now to help your business thrive in 2021 and beyond.

What is it?

Food Works SW offers 12 food-grade business units, five development kitchens including a pilot bakery on a funky, functional and expansive site near J21 of the M5. Under its bright yellow roof it’s got everything an ambitious start-up, scale-up or established food business needs to take it to the next level. Its purpose is simply to support the development and growth of food and drink businesses of any size across the South West of England.

Kitchens and business units Food Works SW has four purpose built large food-grade development kitchens and a trial kitchen for smaller development work. They can be hired out by the hour, day or week for R&D,

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trials and batch runs or as a peak season or ‘sudden surge’ addition to your existing facilities. You can also hire a food-grade business unit on easy, rolling terms – there are 12 ranging in size from 1,000 to 1,500 square foot. Let our experts help you consolidate your product range or test out innovative new products and processes in our development kitchens without bringing your existing production lines to a grinding – and expensive – halt.

Business seeking to diversify For farmers and food producers diversifying in light of Brexit, a tour of Food Works SW may be the best investment you make all year. If you’ve got the ideas and base products, but need support to scope out your ideas, to become more commercial or to attain the correct certification and food hygiene ratings to operate in new markets, we can help. Come to explore the site and its impressive facilities and to talk to us over a coffee in the

business lounge before heading off, brimming with food for thought.

Pilot bakery and dairy facilities Bread and bakery is a significant industry in the region, and Food Works SW’s brand new pilot bakery facility is now taking bookings for 2021. Next up is the site’s well-equipped pilot dairy facility, which gets its big reveal early in 2021, ready for R&D in both dairy products and their plant-based equivalents. As with the bakery, farmers and producers seeking to diversify or to expand their range can hire the dairy by the half day, day or week to carry out R&D at attractive rates, before putting their perfected products into larger-scale production.

In-house expertise Friendly on-site professionals are on hand to provide expertise at all levels from the basics to the highly technical.

If you need advice on lab-testing or labelling, regulations and legislation,

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“For farmers and food producers diversifying in light of Brexit, a tour of Food Works SW may be the best investment you make all year.”

ingredients or allergens, cooking times or calories, we can help. If you’re doing R&D and seek to perfect your tastes and textures, or you’re rebranding and want a steer towards new working partners or high-quality suppliers and stockists, we’re waiting to share this knowledge with you.

Business lounge Our comfortable business lounge is available for all business users needing a touchdown area to catch up with emails with excellent WiFi and refreshments available through our on-site Moorland Cafe and for those who want to hold informal business meetings and client introductions in our friendly, professional environment.

Tenants and test kitchen users Firms using Food Works SW have included Soul Food Salads, Perfect Treats, Scruffy Monkey, Fodder, Seaforth Drinks, Glutenescape and Field Doctor. Ready meals, gluten free,

superfood boxes, drinks, sauces, vegan and vegetarian products are also now being prepared at Food Works SW.

Business membership Food and drink professionals are welcome to join Food Works SW’s growing professional network with business membership offer. Business members receive discounts on meeting room and kitchen hire and technical support as well as information on grants, regulations and legislation; event invites and market intelligence; discounts on accredited courses; support for selling online and to retailers; and much more. Our website is kept up to date with news of our latest training, open and members’ webinars, technical workshops and networking events.

to connect, provide guidance and add value to the region’s phenomenal food and drinks businesses at a time when many of them need our support.

Our expertise and facilities give your business the space, professionalism and edge it needs to succeed in the months and years to come.

Food Works SW: Business Support at Food Works SW: Take a virtual tour: Contact Simon, Zoe and Rachel for more information on 01934 426 327 or enquiries@foodworks-sw.co.uk

Book a tour or trial now At Food Works SW, we want producers in the South West to collaborate, innovate, identify new markets and create jobs within the sector. We hope

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Getting a slice of the Mergers & Acquisitions (M&A) pie

Getting a slice of the Mergers & Acquisitions (M&A) pie The food and drink sector has been one of the more active market segments for deals in recent years, and has attracted strong valuations.

In part this has been driven by large, listed companies, both here and abroad, seeking out opportunities in the highly developed UK food industry.

On top of this, we see food and drink ‘unicorns’ that seemingly rise from nowhere, are suddenly everywhere and then are snapped up for staggering profit multiples, making their founders very wealthy.

Let’s say you’re an ingredient manufacturer supplying other food businesses who make consumer products, and you make profit of £1 million. Assume also that you’re trying to sell to a large, quoted food business.

Or perhaps you are ultra-ambitious and see your brand as the next ‘unicorn’.

Companies quoted on the stock market have a published Price Earnings ratio (PE ratio). In its most basic sense, this is the company’s value divided by its profit. Looked at the other way around, it’s the number of years of current profit that their company is worth. Generally, a company that the stock market views positively will have a higher PE ratio and vice versa.

How to be a unicorn is a whole different topic, so we will focus here on how realistic is it to exit your business by selling to a large group?

Returning to our example, say your quoted buyer has a PE ratio of 12 and comes along and offers you eight times your profit to buy your business,

As a food business owner, you might like to get a slice of this pie for yourself.

Independence is good, but none of us can carry on forever, so maybe cashing-out to a larger business with deep pockets could be the answer.

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To answer that question, it will help to understand about the economics of how these transactions work.

so £8 million. That sounds like a good sum, and your Old Mill financial planner tells you it’s enough for your desired lifestyle and a comfortable retirement.

But why does it work for the buyer?

Sure, they add £1 million to their group profits, but having paid you £8 million for it that means the deal has an eight-year payback. Is that good?

This is where the PE ratio is relevant.

When the buyer publishes its next accounts and shows it has an extra £1 million per year of profit, then assuming its PE is still 12, the group’s value will increase by £12 million.

Having only paid you £8 million, they have effectively ‘magicked-up’ £4 million of additional value. The share price goes up, investors are pleased with the directors and they get a nice bonus. Everyone’s a winner.

The reason for this is quite technical and related to cost of capital, but in very brief terms, it is because large

Food & Drink Insight Edition 1, 2021

“ Not every food business can sell to a big corporate for a great multiple.” quoted groups can access money more cheaply than private businesses.

be displeased and the directors look less clever.

So, is the logical conclusion then that quoted groups should go around and acquire any businesses they can and make as much ‘magic value’ as possible?

The quality of acquisitions is important then.

No, they don’t do this. So why not?

The example we have been looking at is over-simplified and missing a key point. I said earlier that the PE ratio is an indication of how positively the stock market views the group. For the ‘magic value’ to appear, the quality of the acquired business needs to match the quality of the buyer. If the group did just go around and buy every business it could without regard to quality, then the purchased profit may not be sustainable, the market would realise this, and the PE ratio will fall. And with it goes not just the ‘magic value’, but maybe the original value too. Suddenly, the investors will

What do we mean by ‘quality’?

This covers a whole raft of things, and the details depend on which segment of the industry you are in, but in essence it comes down to two things: • Is there a growing trend in earnings that is capable of being maintained; and

So, just because the food and drink sector has been ‘hot’ for M&A activity, not every food business can sell to a big corporate for a great multiple.

If you’re aiming to go down this route, your Old Mill adviser can work with you to put plans in place to shape your business towards this goal.

Mark Neath Corporate Finance Director 07825 620049 mark.neath@om.uk

• Can the earnings be protected from downside risks?

Acquiring a business is costly in both time and advisers’ fees, so smaller deals are uneconomical.

Consequently, many corporate buyers will have a minimum deal size. This varies, but often starts at £1 million of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).

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Taste of the West

Taste of the West John Sheaves, Chief Executive of Taste of the West Ltd asks how the food and drink sector here in the South West will recover over the next few months?

The COVID-19 pandemic has exposed the fragility of parts of the UK’s complex food supply chains, which let’s face it, are mostly national or global.

While supermarkets have done well from the outbreak with volumes and profits soaring, many smaller food and drink producers have been hit hard by the lockdown, with too many being marginalised by the big retailers. For speciality, artisan producers who sell little or nothing to supermarkets, the situation that developed over the summer months was nothing short of devastating. Many of these businesses have been set up specifically to sell to independent retailers and particularly the foodservice sector rather than the supermarkets so more value from the supply chain could be attributed to them as individuals. In fact, for the last 30 years, Taste of the West was strongly advising businesses to differentiate their markets by moving into the independent sector.

Many of the restaurants, cafés, pubs and bars that have championed the

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region’s products in direct response to this marketing shift over the last 30 years closed in March and then only re-opened with restrictions in place which limited turnover. All of a sudden, we risked losing the whole complex ecology of our artisan food system.

Indeed, many wholesale food suppliers were having difficulties because so many of their major customers in the catering world were closed down.

That said, during the outbreak, many West Country food producers found innovative and novel ways of selling their products directly to the consumer.

Very quickly, individual cafés, pubs and restaurants actually followed suit and performed miracles by changing their business model to a ‘take-out’ offer rather than eat in, so some positive news – will this level of innovation lead to changes in the way food and drink is purchased in future – I suspect so.

By September of course, things started to ease, or so we thought and then bang – the Government decided to use a national sledgehammer to a struggling foodservice sector here in

the South West by instigating a 10pm curfew. Fast forward to Christmas and trade was all but taken away with a ‘one household system’ in place and tens of thousands of reservations deleted from the diary before of course on-site trade was taken away altogether.

What is clear through these difficult times, is that things are changing and fast, we have a younger market now who are much more tech savvy and willing and able to embrace digital technology to get what they want, when they want it - quickly and conveniently, often delivered to their homes. Through these last few months – this modern and fast-moving market has developed a yearning for really good food and drink, something different, more exciting with a ‘wow’ factor. They have also discovered and developed an ethical purchasing ethos which supports the smaller and more localised food producer – this is great news, but we as a sector need to respond to this and quickly before they move on.

Food & Drink Insight Edition 1, 2021

“Remember, as one door closes, another opens up...”

Firstly, it is going to be a real challenge to get our fantastic foodie products out there, showcased and directly in front of this exciting audience.

Traditional supermarkets will not do it for us, so we need a different marketplace developed – one which will lead and inspire, is immediate and exciting, and can deliver. Our endeavours must start now if we are to realise the opportunity for the food and drink industry here in the South West to take back some control and some of the added value too, Taste of the West will be taking a lead in this development over the coming months.

Secondly, it is also clear to me that the SME food & drink sector will need to work together in a way that they rarely have done before. I say this because I believe strongly now that we are in a vacuum, where the Government believes that they have done their bit to support UK businesses through the pandemic. Meanwhile, they have muddled through Brexit leaving many exporters at the mercy of the customs officials or contemplating possible

duties. Simultaneously the Government are persevering with the development of a National Food Strategy which strangely is being promoted in two parts. They are listening to eminent organisations such as the National Farmers Union, and the Food & Drink Federation however those businesses in the SME sector appear to be anonymous in this Government market place, and yet their policies and regulations could affect us all.

This is why Taste of the West is helping to lead a new national effort to coordinate food groups from around the UK, but particularly England so that our sector can be heard with more vision, clarity and effect. We have helped launch the brand new ‘Food from England’ initiative which represents over 43,000 SME food and drink businesses which will certainly help get our message out there.

Working together creates scale which is powerful in a complex market place.

The one growth area of note is online of course – a saviour in the summer months and a real antidote to failing national supply chains. While turnover is lower in eat out venues, this is not to say that people are eating less! It is just that they are eating differently and more at home – so if consumers cannot go out to eat in the volumes we as a sector need then we need to go to them. This is how we should adapt and innovate. Remember, as one door closes, another opens up.

John Sheaves Chief Executive, Taste of the West Ltd.

The way forward for individual businesses though surrounds two words – adaptation and innovation.

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Financial planning for food and drink business owners

Financial planning for food and drink business owners Running a successful food and drink business requires many elements including vision, strategy and effective planning, something most business leaders take in their stride.

Sometimes the day to day pressures of running the business can result in one’s personal finances taking a back seat.

It’s true to say that the daily pressures of business can be all consuming which can lead to a clear disconnect between the performance of the business and the owner’s personal goals and aspirations for the future.

I have worked with a range of businesses primarily in the South West for the past five years during which time I have seen a number of owners approaching retirement with no clear idea of how much they need to support their desired lifestyle or indeed no clear idea of what a life after business looks like for them.

In the words of Benjamin Franklin: ‘by failing to prepare, you are preparing to fail.’ This lack of attention to forward planning can have a number of negative outcomes for both the business itself in terms of its people and its performance as well as the

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owner and their families who may never be able to accomplish the life they really want to live when they are still young and healthy enough to do so.

The good news is, with some careful planning, good communication and collaborative expertise from your trusted advisers you can align the two aspects to achieve both business and personal success.

As the saying goes, ‘procrastination is the thief of time’ so don’t be tempted to put it off for another day – good financial planning is about being prepared, disciplined and having the clarity to know how much you actually need.

Where do I start?

I always encourage my clients to ‘start with the end in mind’ rather than focus on the financials from the beginning. This means answering some key questions to establish ambitions and values which have often never

been previously considered and are critical to the success of the plan. A helpful starting point is to consider the following points; • What was the owner’s original motivation for starting in business and what is it that they set out to achieve in the beginning?

• How long do they see themselves running the business and at what point do they wish to reduce involvement with a view to exit?

• What does financial independence mean to them?

• As they think about their future, what would they class as being their one major overriding financial objective?

This type of discussion can be exciting, revealing and often challenging particularly where we identify differences in priorities for owners and their family. It is, however, absolutely necessary to understand what your personal goals are. Then you can

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begin to quantify the cost of your desired lifestyle in order to build a tailored personal financial plan with a specific target in mind. This is one of the building blocks needed to create a successful plan.

How do I know if I’m on track or not?

A series of detailed personal cash flow projections (based upon certain assumptions) help to demonstrate whether or not the aforementioned objectives are actually achievable. We will also look to see if the owners loved ones are well enough provided for in the event of premature death and advise on establishment of life cover if necessary providing valuable peace of mind to the owner and their families should the worst occur.

The cash flow planning exercise takes into account current and future expected personal cash inflows and outflows as well as existing asset values such as business equity,

personal cash deposits, investments and pension savings and income.

We have the flexibility to model different scenarios to fit the specific circumstances. For example, many of my clients want to be able to assess which ‘exit’ option would be more viable for them? – whether it be a full trade sale to an external party, sell to a suitable group of senior management / employees under a Management Buy Out (MBO structure) or simply for them to maintain equity ownership but take more of a backseat in order to pursue more leisure activities and quality family time.

By working together to deliver this plan we can identify how much a business needs to generate in order to meet the lifestyle needs of the seller – this is powerful information helping to give the owner confidence to make an informed decision when making operational decisions and organising succession and ultimately, exit from

the business.

Inevitably, this work also highlights further areas for consideration where we can pin-point how we could better organise a client’s personal finances from a cost, risk, tax efficiency and overall wealth management perspective.

Working together to deliver success Earlier in this piece, I mentioned the importance of input from trusted advisers to co-ordinate creation, delivery and implementation of the plan. At Old Mill, we offer a comprehensive range of financial planning, tax & accountancy expertise all of which comes together at a number of points during the initial planning process and thereafter.

The aim is to build a financial ‘road map’ to be reviewed regularly to ensure the business owner remains on course to meet their longer-term

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lorem upsum Financial planning for food and drink business owners

“When looking ahead to life after business, it is helpful to consider diversifying sources of wealth rather than relying on a financial future which is solely dependent on a single event – the sale of a business – which brings with it significant risks.”

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Food & Drink Insight Edition 1, 2021

aspirations.

• Directors responsibilities

Having identified how much the owner needs from his business, the obvious question is whether the business is performing at a level where it’s likely to support the required valuation and what changes are needed to enhance efficiencies leading to improved profit margins, turnover and profitability?

• The process for dispute resolution

Positive change to business performance should always be based on accurate and timely information which means the need to apply some scrutiny over how well financial and tax administration is dealt with within a firm. Our clients tell us that they want to see and access financial information in one place which is why we have actively supported the transition to cloud accounting with use of bank feeds to improve the quality of information with access to real time numbers and the Dext app add on to help streamline the processing of invoices. These are powerful improvements over traditional accounting practices bringing greater transparency and pace not to mention helping to futureproof the business in meeting HMRC’s forthcoming digital reporting requirements under the introduction of Making Tax Digital.

But it’s not just about efficiency of process and meeting compliance requirements. Modernising financial systems in this way can also help a business owner to better understand their business cash flow needs and gain a better all-round insight into how the business is performing and where to prioritise changes to existing practices in the drive for performance improvement.

Old Mill advisers will take the time to understand the challenges faced by business leaders and provide a reliable ‘sounding board’ to answer questions, challenge the status quo, offer new ideas, insights and feedback bringing fresh perspectives to help fuel the clients ambition and support their growth plans helping to avoid common pitfalls which could impede progress.

The importance of a Shareholders’ or Partnership Agreement Limited companies should always ensure that they have a Shareholders’ Agreement (SHA) in place. The equivalent for a partnership is known as a Partnership Agreement. A SHA is a private contract between shareholders of the company. The main objective of entering into such an agreement to govern shareholders’ investment and lay down clear guidelines on the management of day to day affairs of the company covering a range of areas such as;

• How the company is to maintain accounts and who has access to records • The transfer of shares in the event of death • The need to insure key people in the business against death or diagnosis of serious illness • Competition restrictions • Confidentiality expectations • Share structure (voting rights and dividend entitlement).

A well-crafted SHA provides a sound platform from which to trade but is so often overlooked leading to conflict and unnecessary time and cost in future years.

When looking ahead to life after business, it’s helpful to consider diversifying sources of wealth rather than relying on a financial future which is solely dependent on a single event – the sale of a business - which brings with it significant risks. How easy is it to sell? Where are the buyers? What is it worth?

It’s important to put in place a remuneration structure to utilise the most tax efficient way to extract profit from the business. This would typically include company contributions to a registered pension plan on behalf of the owner(s) which enjoy attractive tax reliefs and help build wealth outside of the business to support future lifestyle plans.

Old Mill advisers firmly believe that close collaboration between client and financial planner along with accountancy and tax specialists is an essential ingredient to help all parties to commit to a course of action and ultimately to accomplish the vision set out at the beginning of the exercise.

Tony Hawes Chartered Financial Planner 07854 413809 anthony.hawes@om.uk At Old Mill, our purpose is to make your tomorrow start today.

If the issues raised in this article resonate with you then don’t hesitate to get in touch.

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Turning your waste into profit

Turning your waste into profit Research highlights that over 30% of all food produced in the world is lost or wasted either through the value chain or as consumer waste1. But whilst food waste has never been such a hot topic, there are also other types of waste your business can reduce in order to improve both efficiencies and profitability - and that’s what we’re looking at here.

Business waste comes in a variety of forms, whether it’s wasted expenses, wasted materials, wasted opportunities or even just wasted time, and all of these erode your margin.

Unfortunately, waste in most manufacturing processes is inevitable and spoilage unavoidable, but more and more companies are beginning to think differently by embracing the so-called ‘circular economy’ where reuse and recycling provides environmental benefits with less waste ultimately going into landfill.

This is a more strategic way of thinking about waste and we recommend that you start by analysing your processes to evaluate your waste and then aim to create an action plan with clear objectives for cutting waste of all types.

When reviewing your business processes and trying to spot ways to reduce waste, often a fresh pair of eyes can provide new perspectives or even challenge your thinking as it’s very easy to get set in your ways of doing things or perhaps you have developed a blind spot when it comes to thinking about alternatives.

By-product or waste?

One key area to consider is whether you may be able to sell on your waste (or what’s known as ‘by-product’) from raw materials/ingredients as something else which allows you to increase the revenue you earn from your production process?

Essentially, by-product is a secondary product obtained in the manufacturing process of the main product whereas

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waste is defined as inefficient activities that don’t add value to a product or service.

In dairy, buttermilk is the by-product left after churning the cream that becomes butter. Similarly, whey is the liquid remaining after milk has been curdled and strained in the process of making cheese. Both these by-products also have an intrinsic value that can be monetised as secondary products (particularly whey with whey protein concentrate for baby milk formula and the growth in demand for protein shakes in recent years).

Another great example of rethinking food waste as a valuable resource is Toast Ale which is an award-winning craft beer that uses surplus bread instead of barley and turns it into beer!

Repurposing and reselling waste is also fast becoming a hotbed of entrepreneurial activity with tech companies starting to develop innovative solutions to tackle waste. For instance, Winnow has Artificial Intelligence technology that helps commercial kitchens to measure and monetise their food waste and OLIO is an app that connects neighbours with each other and with local businesses so surplus food can be shared, not thrown away.

Does this inspire you to generate secondary revenue streams by identifying ways of re-using ingredients and materials that are surplus or a by-product in your business?

And remember, coming up with innovative, proprietary ideas and processes that mean by-product ingredients can be

Food & Drink Insight Edition 1, 2021

“ Repurposing and reselling waste is fast becoming a hotbed of entrepreneurial activity.”

upcycled into another product may qualify for valuable Research & Development (R&D) tax relief – just speak to one of our experts in this field.

Putting waste management at the heart of your business You might consider developing a Business Waste Checklist to get you thinking about what other types of waste might be lurking in your business: 1. Starting with your business premises, how energy efficient is your workspace? From understanding the environmental credentials of your energy supplier to ensuring equipment is powered down at the end of the day. This assessment should include things like whether to install solar panels, sensored lighting, energy saving bulbs etc…

2. Have you thought about whether your supply chain is sustainable?

3. Conduct a thorough waste audit that covers everything that enters your business from suppliers and everything that goes out the door. What are you doing around packaging?

5. Is there scope in your business to consider more flexible working? During the pandemic homeworking saved many of us time by not having to travel to our workplace as often reducing our carbon footprint.

All these small changes can add up to make a big difference and with mounting concern about climate change coupled with the ‘Blue Planet’ effect, businesses can no longer afford to ignore consumers’ ever-increasing expectations on sustainability. Collectively, we all share the responsibility of helping our environment, yet it needn’t be an additional burden for businesses; reducing waste can open up new opportunities and help improve your bottom line.

For further information on how tackling waste can benefit your business contact: Lorraine Bolland Director 07817 491732 lorraine.bolland@om.uk

1Source: Ellen MacArthur Foundation

4. Think about your end-to-end processes or production lines and consider whether small adjustments might improve efficiencies.

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Understanding your data

Understanding your data Following a devastating year, as many pubs, restaurants, hotels, and businesses across the whole food and drink supply chain are putting recovery plans in place, we take a look at ways owner-managers can use the lessons learned from COVID-19 to put their enterprises on a stronger footing going forwards.

Making decisions with clarity

Benefits of adopting cloud accounting

One of the key enablers during this period was a more widespread adoption of cloud accounting solutions as food and drink companies sought to improve business efficiencies and gain more insight through technology and automating processes.

If everything is set up correctly, cloud accounting shines a light on the key metrics in your business so that you start to fully understand the underlying issues and challenges and begin to see the opportunities in real-time. This approach potentially changes the entire basis of the conversation that we, as advisers, are now having with our clients.

The pandemic reinforced the premise, more than ever before, that cash is the lifeblood of a business, so being able to get an accurate handle on cash flows and other critical key performance indicators (KPIs) was a real game changer.

We expect this shift to continue to gather pace as more and more business owners begin to see the advantages of being able to access real-time data points which informs better, faster decision making.

Perceived blockages Many smaller businesses have historically been reluctant to invest in technology and systems due to the perceived costs, but the pandemic has been a catalyst in accelerating the digital transformation that’s now playing out.

We also recognise that there’s perhaps an underlying fear that transitioning to a cloud-based platform can be difficult to implement, but it’s important to grasp is that it’s not about technology per se. At its core, we’re talking about an integrated accounting system that goes beyond the basic bookkeeping function.

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That said, one of the hurdles that needs to be overcome is a recognition that many businesses in the sector still don’t produce regular management accounts and one of the reasons for this could be that they don’t see the inherent value in regular financial reports.

Managing cash flow One of the most important things to track in a business is cash flow; the measurement of cash moving into and out of a business. Traditionally, cash flow forecasting has been done in spreadsheets, which are both time-consuming and sometimes difficult to understand.

One of the cornerstones of cloud-based technology has been the development of cash flow forecasting tools that have made financial forecasts more accurate and easier to understand.

The same technology has also served an important role in underpinning cash flow management during the recent economic turmoil in that an operational forecast provides important insights into the daily fluctuations in cash flows (in terms of where things will be next week, next month and even next year) which enables the business to make datadriven decisions with more confidence.

Food & Drink Insight Edition 1, 2021 2019

Getting started Whilst there are a number of steps needed to set up a fully integrated system, the base level required to get going is what we refer to as Cloud Accounting Platform 1.0 or CAP 1.0.

Small efficiency tweaks or price adjustments, based on realtime information, can have an instant positive impact on profits.

In a wider context the food and drink industry may benefit from apps that have been developed for a whole range of scenarios from shortening payment terms to invoice funding and from workflow systems to expense management tools.

Automating processes in this way by linking to the so-called app ecosystem surrounding Xero can also reduce costs and free up time which allow the business owner to focus on other more, high value activities that will better serve the business in terms of its future growth.

Bank Feed This is the minimum level that businesses should be operating at providing bank feeds and invoice automation into Xero.

CAP 1.0 means that businesses can easily reconcile their bank in just a few clicks and upload invoices by taking a photo on their smartphone which saves huge amounts of time. It also means that they are updating their data more often, clearly improving the live information that’s available.

What does all of this mean in practice?

In the context of the pub or wider hospitality trade this approach could potentially highlight certain product lines that are not priced highly enough to deliver desired margins or perhaps ingredient price increases that may cause the whole dish to be under-priced.

Looking to the future, cloud-based accounting will continue to improve the level of automation in the finance function as well as aligning it closer to daily operations. Year-end accounts meetings and routine compliance will become a much simpler exercise and, instead, conversations with your accountant will be focused on real-time, or even forwardlooking data.

For further information on how cloud accounting can benefit your business, please get in contact.

Lucy Bennett Adviser 01935 709320 lucy.bennett@om.uk

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The VAT-related issues impacting the Pagelatest title here Food & Drink sector

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Food & Drink Insight Edition 1, 2021

The latest VAT-related issues impacting the Food & Drink sector In this article we focus on several VAT changes implemented due to the coronavirus pandemic and the end of the Brexit transition period.

There’s no doubt that these events will continue to impact businesses in the food and drink sector as the year progresses, and we thought it timely to provide you with a round up some of the key points and recent developments.

1. VAT rates Firstly, we review the temporary reduced VAT rate introduced for the hospitality sector as a reaction to business restrictions implemented due to the pandemic. As from 15 April 2020, VAT chargeable on certain standard rated supplies of food and drink within the sector became reduced rated. Initially, the reduced rate was 5%. HM Revenue & Customs (HMRC) then extended the duration of this change, which is now until 30 September 2021. A new temporary higher reduced rate of 12.5% is then to be introduced as from 1 October 2021 until 31 March 2022. This measure has provided much needed support for the sector. The reduced rating covers meals sold and consumed at restaurants, cafés, pubs, hotels, etc., along with non-alcoholic drinks, and take-away hot food and non-alcoholic hot drinks. It’s certainly feasible, if the pandemic is not contained, that the application of a lower VAT rate could continue, noting that it would be even better if the temporary rate change could become permanent, considering the lower rates in many EU countries.

Whether the UK will consider any future changes to the VAT rates of food and drink sales is of great interest. Currently, basic foodstuffs and food are zero-rated, so the VAT rate can only be made higher.

So, might the Government seek to increase the VAT yield by applying a reduced rate of VAT on any foodstuffs or beverages, as the EU do?

This wouldn’t prove popular and certainly short term is unlikely – noting that the cost of importing fresh fruit, vegetables, meat, fish, and basic foodstuffs such as sugar, grain and cereal crops has increased for this sector, due to changes in import arrangements with the EU.

2. Trade changes From 1 January 2021, the UK implemented numerous different rules around the trade of goods with EU suppliers and customers. This has impacted sales to private customers (non-business and non-VAT registered) and to businesses, as well as purchases in terms of pricing, movement of goods and cost.

The impact on cash flow of buying in overseas food and drink needs to be considered - with all purchases, including

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The latest VAT-related issues impacting the Food & Drink sector

“The impact on cash flow of buying in overseas food and drink needs to be considered - with all purchases, including those from EU suppliers, now treated as imports”

those from EU suppliers, now treated as imports.

In order to deal with the cash flow impact of import VAT payable at the point goods are cleared through UK customs on any standard rated items (e.g., packaging, containers, labels, flavouring, additives, colouring), and possible duty charges (which can’t be claimed back but form an absolute cost to the importer), it’s worthwhile checking whether it’s better to change from the current arrangements to the newly introduced postponed VAT accounting system. Alternatively, it may be better - if paying a significant amount of customs duty - to establish a duty deferment account or use an import entry simplification process. Customs duty charges aren’t applicable to most categories imported goods which can be shown to be of EU origin.

Export invoices and other documents require an Economic Operators Registration and Identification (EORI) number and details of origin even when selling into the EU. Although food is often duty free, this can’t be assumed for all exports, including items containing food products, especially if not of UK origin. It should be noted that, depending on the terms of trade with your customers, if you’re responsible for paying the VAT and duty at the point the goods cross the border into the EU, your business may be required to register for VAT, and may need to pay the taxes before the goods can enter the country in question - food and drink are subject to VAT in the EU and these rates vary across the member states.

Proof of UK export is also required in order to zero rate export sales, whether to the EU or outside the EU. For further HMRC guidance, please check our website.

3. Recent food and drink VAT cases In recent years there has been a raft of VAT cases in the food and drink sector.

Although UK VAT law provides for VAT zero-rating of basic food products and beverages, there are many exceptions to this.

VAT legislation, as originally drafted, did not envisage

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Food & Drink Insight Edition 1, 2021

modern developments in food technology and production, or anticipate trends in the consumer market. As a result, the ‘exception’ rules have increased in complexity and coverage since VAT was first introduced in 1973. ‘Excepted’ food and drink products are standard rated (subject to VAT at the current rate of 20%), and the list is getting longer.

Marketing and customer perception The outcome of the case ‘The Core (Swindon) Limited [2020] UKUT 0301’ focused on the importance of marketing and customer perception. The company sold a mix of fruit and vegetable juices as part of a ‘juice cleanse programme’.

Usually, the sale of fruit juices is standard rated. The Upper Tier Tribunal (UT) upheld the earlier First Tier Tribunal (FTT) decision that, when sold as a meal replacement as part of this programme, the juices were food and zero rated. The company was therefore correct to have sold these as zero rated.

The First Tier Tribunal (FTT) had previously found that the customers regarded the juices as meal replacements and were marketed as such, so were food and zero rated.

HMRC appealed to the UT, contending it was incorrect to allow the marketing approach to underpin the classification of the product as food. The UT found that it was often relevant to consider the way in which a product was sold and marketed, and that a multifactorial approach was required to determine the treatment.

normally from Subway restaurants.

To check the position, HMRC made four test purchases, and ascertained that for each transaction the treatment of zero rating determined by the staff at the till was incorrect – by not asking the customer whether they were eating in or taking the food/drink away from the premises.

HMRC then undertook a surveillance exercise and found that 79.5% of sales (instead of the 39% to 53% declared over the sample period) should have been standard rated.

An assessment was raised which was later reduced to (correctly) treat the sales as VAT-inclusive rather than VATexclusive, and an inaccuracy penalty was also charged.

The FTT upheld HMRC’s assessment and penalty charge, agreeing the basis of the assessment calculation was reasonable and that HMRC had used their best judgement based on the information available to them. The basis of the penalty charge was valid, and the amount charged was correct.

For more information, or if you have any questions about any of the above please get in touch.

Marianne Hawksworth Senior VAT Manager 07527 423430 marianne.hawksworth@om.uk

HMRC’s appeal was dismissed.

Errors in determining sales of takeaway food In ‘Subway (Staines Central) Limited v HMRC [2020] TC07943’, the case focused on an appeal against HMRC’s VAT assessment and inaccuracy penalty, raised due to the incorrect determination of zero-rated sales by a Subway franchisee, Subway (Staines Central) Limited.

HMRC had noted from the company’s VAT returns that the level of standard rated take-away sales was significantly lower over a particular time period than would be expected

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