Irish Farmers Monthly
August 2011
Introduction
The Government’s Food Harvest 2020 publication includes a set of growth targets to be achieved by 2020, including achieving an export target of €12 billion for the agriculture, fisheries and forestry sector. The overall vision for achieving this is ‘Act Smart – Think Green – Achieve Growth’. Bord Bia’s subsequent report, entitled Pathways for Growth, includes five workstreams, one of which is the development of the industry’s capacity to produce innovative products that anticipate consumer demand and deliver new growth streams. One of the principal ways in which farmers can achieve the Food Harvest 2020 vision is by prioritising Research and Development (‘R&D’).
A tax credit is available for companies engaging in ‘R&D’, subject to certain conditions. It amounts to 25 per cent of the qualifying expenditure. Combined with the standard corporate tax deduction of 12.5 per cent, it means that companies incurring qualifying R&D can potentially claim a tax refund of €37.50 for every €100 of expenditure.
A farmer cannot qualify for an R&D tax credit unless his/ her business is undertaken via a corporate structure. The decision as to how to structure one’s business involves many factors, but the availability of the R&D tax credit is certainly a reason to consider establishing a company in the event that R&D is being undertaken.
Qualifying Activities
A number of farming activities could potentially qualify for the credit. The tax credit could apply to trades such as mineral analysis, market gardening and intensive farming.
Examples of the activities which could qualify would include the following:
- development of new types of feedstuff and new processes to produce feedstuff;
- research undertaken to maximise crop yields;
- development of new machinery or ancillary components for tractors, trailers, ploughs etc;
- introduction of a new waste management system; and
- creation of more efficient processes.
Qualifying Conditions
In our experience, while many companies are carrying out R&D work that qualifies for the R&D tax credit, only a minority are actually claiming the credit. There still appears to be a misconception that it relates solely to “men in white coats”. In reality, nothing could be further from the truth. Most companies in the agriculture sector, and indeed across all sectors, are involved in some form of innovation or process improvement. The related costs may well qualify for the R&D tax credit.
The company engaging in the R&D must, in order to qualify for the credit, be seeking to achieve a specific advancement in, or a resolution of a specific uncertainty in, the field of science or technology concerned. In other words, it is not enough that the company is seeking to improve its own processes, if such improved processes are already in existence in the sector concerned.
The credit is available in respect of expenditure such as salaries, consumables used in the R&D process, and plant and machinery used wholly or partly for R&D purposes. The credit is also available in respect of buildings used wholly or partly for R&D purposes, subject to certain conditions. The range of activities to which the R&D credit can apply is extremely wide. Improvements to production output, plant performance and existing processes are examples of activities carried out by many companies, which can qualify for the R&D tax credit.
The R&D tax credit can be received directly as a cash refund from Revenue over a three year period, regardless of whether or not the company has a corporation tax liability. The only
restriction is that the cash refund cannot exceed the payroll taxes paid by the company to Revenue in the relevant accounting period. Any balance can be carried forward for offset against corporation tax arising in future periods. The R&D tax credit claim must be filed within 12 months of the accounting period end.
Conclusion
In summary, this is potentially a very valuable tax relief, which has much wider application than is generally considered. Only companies are entitled to the credit and any farmers engaging in qualifying R&D could consider the establishment of a company in order to claim the relief. It does not apply solely to “men in white coats”.
If you are operating through a company, and believe you may qualify for the credit, you should contact an appropriate tax advisor without delay, as there is only a 12 month window available from the accounting period end for making a claim. Alternatively, if you are not operating through a company, and consider that you may qualify for relief, you could consider the possibility of incorporating your business.
Aidan O’Boyle is a manager in Grant Thornton's tax department
Email aidan.oboyle@ie.gt.com