Have you claimed your tax relief?
Many food and drink companies conduct research but few realise that they are due tax relief on this expenditure. Leyton Consulting's Aimee McKernan reports
Print9 September 2011
Much has been made in recent times of the resilience being shown by the food and drink sector during the economic downturn. Headlines such as the 11% increase in the value of food and drink exports in 2010 (to reach an estimated €7.88bn) have been well received at a time when success stories are in short supply. The reasons put forward for these impressive results are as wide and varied as the companies that operate within the sector. One contributing factor that has become increasingly evident is the level of innovation being carried out in the sector. Innovation has enabled these companies to meet challenges head on, be it ever changing consumer demands, regulatory requirements or pressures on margins. To achieve this level of successful innovation it has been necessary for companies to invest resources, both financial and human in activities such as research and development. It is important that companies avail of their full entitlement to incentives for the carrying out of these activities. One such incentive is the R&D tax credit.
The R&D tax credit
Companies carrying out R&D activities can potentially benefit from a cash refund of 25% on their qualifying R&D expenditure. Qualifying expenditure is the incremental R&D spend in the claim period when compared with the R&D spend in 2003. Therefore if the company spent €300k on R&D in 2010 and €100k in 2003, €200k would be qualifying R&D expenditure (giving rise to an R&D tax credit of €50k i.e. €200k at 25%).
Qualifying expenditure can include staffing costs, materials/consumables, capital equipment, indirect overheads and, with certain restrictions, it is possible to include subcontracting costs to third parties or universities. The R&D tax credit claim must be made within 12 months of the year that the expenditure is incurred.
Scheme guidelines
The rules relating to the R&D tax credit scheme are set out in S766 of the Taxes Consolidation Act 1997. The Revenue Commissioners have also issued guidelines to the scheme. These can be accessed on their website (www.revenue.ie). There are a number of conditions to be satisfied for activities to be considered qualifying R&D activities. For example, the activities must be carried out in an organised, systematic manner and they should seek to achieve scientific/technological advancement and involve the resolution of scientific/technological uncertainty. In Leyton’s experience, many companies in the food and drink sector are carrying out qualifying R&D activities.
Types of R&D in the food and drink sector
Qualifying R&D activities in the food and drink sectors can be found in a range of areas including new product development, process/product improvement and changes to packaging. Expenditure on tasks such as flavour development or masking, ingredient formulation/replacement and techniques to increase product shelf life may qualify for inclusion under the scheme. The development of processes resulting in the improvement of product functionalities should also be considered, as should the development of a manufacturing process or the re-design of a production line process and packaging.
Even after a new or improved product has successfully made it beyond kitchen trials, there may be further qualifying R&D activities to be taken into account in the tax credit. The upscaling of the process to factory scale can often give rise to new scientific/technological uncertainties before the full commercial production can run.
For example, the upscale of a process may need to be discontinued as problems with large scale extrusion of a product are encountered. Alterations to the process may need to be identified and tested. For example it could be necessary to carry out trials running the machine at different temperatures, pressures and speeds. A redesign of the extrusion head may be required resulting in further testing. Even alteration or redesign of the initial formulation must be reconsidered and this may feed back into kitchen trials.
Clearly significant costs can be incurred during the above stages. Every company should also consider these and similar type activities for inclusion in the R&D tax credit. Leyton has assisted many companies in the food and drink industry sector in claiming their R&D tax credits. One issue these companies regularly raise at the outset is the difficulties they have encountered in the past in identifying the point in time that qualifying R&D activities begin or cease. This could result in companies not claiming their full entitlement under the scheme or maybe over-claiming. Leyton works closely with these companies to ensure they claim their full and proper entitlement under the scheme.
Many companies in the food and drink sector who have shown a willingness to invest in research and development have reaped the rewards in terms of commercial success.
These companies should also ensure that the cost of carrying out this R&D is minimised and they are claiming their full entitlement under the R&D tax credit scheme.
Leyton is a leading consulting firm that specialises in research & development (R&D) tax credit claims, R&D grant applications, and R&D revenue audit support. www.leyton.com
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