12 Jul, 2018

Maximising the value of R&D

Research & Development (R&D) tax credits can potentially save Irish food companies significant money. David Leydon, Head of Food and Agribusiness, and Robert Johnson, Senior Tax Specialist with ifac give an overview.

Healthy food which is convenient and good for the environment is a significant trend which Irish food companies are taking note of. Add in the growth of online shopping, speed at which the market is evolving, drive for compostable and recyclable packaging and a picture emerges of a sector where companies must innovate and invest in research and development to be successful.

Consumer insights

ifac clients are involved in either true innovation or renovation - tweaking an existing range by improving flavour or introducing a new SKU (stock keeping unit) for example. For a smaller company developing partnerships with a chef can be a good way to build innovation into the business. Some of the most innovative businesses are working very closely with their sales and marketing team to glean customer insights from the market and some of their key tips include:

  • Clearly define the customer or consumer need. Why would they buy this product?

  • For true innovation, do not be confined by what can be done in the factory today

  • When moving from the research in the kitchen to developing the factory process they make no assumptions and focus on proper line trials at all stages. For example when they are changing from one grade of box to another they never have the attitude “it’ll be grand”. They trial everything to ensure that it will work in practice.

Funding R&D

As Irish food companies invest in R&D there is an opportunity to offset a portion of the costs by submitting a R&D tax claim. It is important to note that by availing of R&D tax credits a company is not precluded from applying and drawing down grant funding for innovation from Bord Bia or Enterprise Ireland for example.

What is the R&D Tax Credit

An R&D Tax Credit is an additional tax credit equalling 25% of the relevant R&D costs of a company. In order for the costs to be eligible for an R&D credit the costs must be incurred in a qualifying R&D activity. A qualifying activity is systemic research into an approved field of science using theoretical or applied research or experimental development which seeks to a resolve a scientific or technological uncertainty and make a scientific or technological advancement. Experimental development is the activity most of our food clients are engaged in.

In this context a company needs to be able to demonstrate that the improvement they are trying to make is novel or not available in the public domain. This is particularly relevant to food companies who are trying to improve their products in line with competitors where existing improvements may not be available in the public domain.

The relevant costs allowable include all direct costs in the R&D, a limited number of indirect costs, the materials required for the R&D, payments to sub-contractors and universities (subject to limits) and even costs incurred on a building used for R&D purposes. The credit is applicable for all stages of innovation and here are some practical examples of relevant activity:

  • Capturing customer trends and insights – market research

  • Purchasing ingredients for the purposes of R&D

  • Travel costs to examine markets or meet collaborators

  • Labour costs

  • Management time

  • Tasting panels

Keeping records

Critical to a successful R&D tax claim application is the logging of accurate records for time spent on the project by every person in the business. Do not put this job on the long finger – keep it up-to-date and your application will have a much better chance of success. Also, all expenses must be receipted and kept.

There are numerous other conditions and restrictions under this scheme, however where it applies it is generally a significantly rewarding scheme. Profitable companies can reduce their overall tax liability where the credit is claimed and even loss making companies can receive a payment equal to the credit over three instalments.

Other Reliefs

Knowledge Development Box

There are a number of other generous reliefs available where R&D is being undertaken by a company. These include the Knowledge Development Box which reduces the corporation tax rate on income derived from certain Intellectual Property developed by a company through R&D to 6.25% from the standard 12.5%.

It should be noted that where a company has outsourced a significant element of if it’s R&D activities, whether inter-company group or to third parties, the reduction in the corporation tax rate will be reduced. Therefore if the company group has several entities which undertake R&D activities and the income ultimately earned from these activities is earned in a separate company it may be worth considering restructuring the company group activities to maximise this relief.

Capital Allowances on Intellectual Property

In addition where a company purchases or develops intellectual property it is possible to claim the cost of this Intellectual Property against taxable income. Capital allowances on these costs are deductible over either 15 years or are based on the depreciation rate used on these assets in the company accounts.

Examples of such intellectual property include:

  • Patents,

  • Copyrights

  • Registered designs

  • Design rights or Inventions

  • Trademarks

  • Brands

  • Domain names

  • Service mark or publishing title

  • Know-how

  • Certain software

  • Costs associated with applications for certain legal protection

  • Goodwill to the extent that it is directly attributable to relevant intangible assets

  • Licenses to do any of the above

Claims for capital allowances cannot exceed 80% of the relevant taxable profits from in any given accounting period

Advice on hand

As you focus on improving the nutritional profile of your product, making sure your packaging looks great and is environmentally sound, thinking about what will work for your consumer, ifac are available to work with you to make sure you claim back R&D tax credits and save some money for your business.

Contact David Leydon on 014551036 or email davidleydon@ifac.ie to discuss.

Follow @ifac_FoodAgri on Twitter for food and agribusiness updates.