Agriculture and food emerged as one of the most resilient sectors of the Irish economy throughout the economic downturn and continues to dominate having recorded a seventh successive year of export led growth in 2016. Bord Bia valued Irish agri-food exports at €11 billion in 2016, with the less traditional sub-sectors of prepared foods, dairy ingredients and beverages performing strongest.

As a food producing nation, Ireland has endless advantages such as its reputation, secure food chain, climate, location on the periphery of Europe and access to the EU single market. However, it is essential that we are cognisant of ongoing challenges including currency movements, food security and regulation. The uncertain political environment in two of our key export markets – UK and the US valued at €4.13 billion and €1.1 billion respectively presents additional challenges to the industry.

Sustainability has also been placed firmly on the agenda in recent times supported by the commitment of over 540 Irish agri-food businesses to the Origin Green programme. The only national sustainability programme in the world, Origin Green enables farmers and producers to set and achieve measurable sustainability targets – reducing environmental impact and protecting the extraordinarily rich natural resources that our country enjoys

As we deal with uncertain global markets and recognise the future growth of the agri-food sector must be achieved in a sustainable manner, the role of technology in powering innovation and efficiencies is vital in protecting and transforming the sector.

Technology is driving change and redefining virtually every business sector including our most traditional indigenous sector – agriculture. The number of tech companies investing time and money in new technology and analytics for the agri-food sector both domestically and internationally has spiralled in the last decade. Success by early entrants to the market place has opened doors for others to follow creating a competitive and vibrant market.

Becoming more competitive in international markets will require the raising of technical efficiencies and product quality to ensure both the future economic and environmental resilience of the Agri-Food sector. The rewards for farming, rural regions and the wider national economy are potentially great and in a very real sense, Ireland now has a ‘win-win’ opportunity to adopt a leading role in the development of a ‘smarter’ agriculture. But to rise to this challenge, we need to harness collective vision and wisdom.

In Ireland, food and drink producers have been steering the way in product innovation with the arrival of hand-made crisps and craft beers gaining increased market share. While at farm level, developments in labour saving equipment, improved genomics together with advances in animal and crop production have been driven by technology.

As global demand for food continues to grow, there is an increasing focus on developing innovative solutions that can be easily commercialised. The arrival of niche technology companies in the market has forced long established industry players to position research and development activities at the forefront of their business strategy.

As with any other sector, the management of cash flow is one of the greatest headaches faced by agri-food companies on a regular basis. The challenge is often severe for companies investing resources in Research & Development (R&D) and new product development as huge capital investment is required for products which have yet to generate any return. The availability of credit is often the greatest lifeblood to companies in this situation, however early stage companies lacking reputation may not even benefit from this luxury.

There are a number of tax reliefs available to companies undertaking agri-food R&D to reduce taxable profits thereby releasing much needed cash flow. Such reliefs include the R&D tax credit, Knowledge Development Box (KDB), general capital allowances and Intangible Assets Capital Allowances. In addition, companies may wish to explore the Employment and Investment Incentive Scheme (EIIS) to raise funding as an alternative or in addition to traditional bank funding or venture capital.

Employment and Investment Incentive Scheme

EIIS capital is available to most trading SME’s including agri food, retail and technology companies provided they are incorporated within Ireland or European Economic Area and meet the required criteria.

For the purposes of EIIS, an SME is one with less than 250 employees, a turnover not exceeding €50 million or balance sheet value not exceeding €43 million. The company must be either a new company or have traded for less than 7 years. If a company has traded for more than 7 years funding may be raised to fund a new product or entry to a new market where the total investment is expected to be greater than 50% of the average annual turnover for the prior 5 years. Furthermore the company should be a privately held trading company not under the control of another company and all issued share capital should be fully paid up.

A company or its associated companies are restricted to raising a lifetime capital limit of €15 million. Furthermore the maximum capital which may be raised in any 12 month period is €5 million.

Raising EIIS funding may impact on a company’s ability to obtain alternative sources of state aid or grant funding.

From the time a company issues EIIS shares, they will need to be focusing on the exit four years later, ensuring it has sufficient retained profits and the ability to buy back the EIIS shares.

From an investor perspective, EIIS is one of the sole remaining tax reliefs against total income and appeals to those paying tax at the higher rates. EIIS is a split tax relief with 30% available in the year of investment and a further 10% after four years provided the investee company has satisfied criteria surrounding job creation and/or research and development expenditure. Relief for the investor is subject to an annual investment limit of €150,000 each year until 2020.

Research and Development Tax Credit

The R&D tax credit is a major benefit to Irish companies involved in research and development activities representing a potential refund of 25% of the cost involved in R&D activities. Profit making companies will see a direct reduction in their tax liability, whilst loss making companies can claim the credit in three instalments. Either way, it brings a cash benefit.

In order to qualify for the R&D tax credit, the activities undertaken by the company must be:

• systematic, investigative or experimental activity;
• in a field of science or technology;
• either basic research, applied research, or experimental development; and
• it must involve the resolution of a scientific or technological uncertainty and seek to achieve a scientific or technological advancement.

Examples of potential R&D activity in the agri-food sector

• development of a new production process yield enhancement;
• development of a new breeding technology;
• development of new/substitute raw materials;
• advancements in product packaging;

In order to utilise the R&D tax credit fully and optimally, it is important to ensure that all eligible costs are captured in the claim. Eligible R&D expenditure can come from a multitude of sources such as:

• direct costs;
• limited indirect costs;
• plant and machinery;
• third party royalties;
• payments to third party subcontractors and third level institutions; and
• qualifying buildings/structures.

While pre trading expenditure is allowable, any grant aid received/receivable is disallowed when calculating an R&D tax credit.

All R&D tax credit claims must be submitted no later than 12 months after the end of the accounting period in which the expenditure was incurred.

Key Employees

Companies in receipt of the R&D tax credit now have an option to use a portion of the credit to reward key employees who have been involved in R&D activities.

The effective income tax rate for such key employees may be reduced to a minimum of 23%, provided certain conditions are met by the company and the individual.

Revenue Audits

The number of Revenue audits and self-reviews in the context of R&D tax credit claims is increasing. If a company receives notice of an impending Revenue audit, it should consider whether there has been an over claim of R&D credits and if so issue a notice of intention to make a voluntary disclosure within fourteen days.

Knowledge Development Box (KDB)

Finance Act 2015 introduced the KDB with the broad objective being the promotion of innovation and to provide an incentive whereby profits arising from patented inventions, copyrighted software, plant breeders’ rights and certain other specific asset classes can effectively be taxed at a reduced rate of 6.25%. The relief is available to companies for accounting periods beginning on or after 1 January 2016 and before 31 December 2020.

Finance Act 2016 introduced the Knowledge Development Box Bill 2016 to provide a legislative framework for a new scheme aimed at SMEs involved in qualifying R&D activities to make them eligible for the reduced corporate tax rate of 6.25% via the Knowledge Development Box (KDB). The Bill also allows long term patents to continue to qualify for KDB after 1 January 2017.

The provisions in the Finance Act 2015 required the establishment of a certification scheme to enable the intellectual property assets associated with SME’s inventions to qualify for the KDB. Eligible SMEs are those with income arising from intellectual property of less than €7.5m and global turnover of less than €50m, where the profits result from R&D. The Bill provides that the Controller of Patents, Designs and Trademarks will oversee and operate this certification scheme.

The Bill outlines the procedures for applying for KDB certificates, who can apply for a certificate, the procedure when an application fails to meet the requirements and when two or more inventions are the subject of a single application.

Should there be a trading loss in respect of a qualifying asset in an accounting period, 50% of the loss will be available for offset in the normal manner.

General Capital Allowances

Capital allowances are granted for tax purposes in lieu of depreciation. Expense incurred in acquiring assets such as machinery, vehicles and buildings are considered capital expenditure and is therefore not deductible from profits in the normal manner. Instead, the cost of the asset is deducted from taxable profit over a number of years.

Additions to plant and machinery may be claimed for the purposes of capital allowances, which can then be offset against the taxable profits of the company’s trade for corporation tax purposes. The current rate of capital allowance is 12.5% per annum, thereby providing a tax write-off over an eight year period.

Additions to buildings, which do not constitute additions to plant and machinery, do not qualify for a tax deduction, unless in the case where they qualify for industrial buildings allowances.

The equivalent of capital allowances in the context of industrial buildings is the industrial buildings annual allowance (IBAA). The current rate of IBAA is 4% per annum, thereby providing a tax write-off over a 25 year period.

The key conditions to be satisfied by the company to qualify for capital allowances are:

• The asset must be owned by the company;
• The asset must be in use wholly and exclusively for the purposes of the trade at the end of the relevant accounting period; and
• The company must have incurred capital expenditure the asset

Where an asset which has qualified for capital allowances is sold for greater than its tax written down value a balancing charge will arise on disposal, similarly where the asset is sold for less than its tax written down value a balancing allowance will arise.

Energy Efficient Equipment

Where a company purchases certain energy efficient equipment on or before 31 December 2017, the accelerated capital allowances scheme may apply. The scheme operates to provide capital allowances equal to 100% of the cost in the year the equipment is purchased and put into use.

It is important to note that the accelerated capital allowances scheme does not extend to equipment acquired under a lease or hire agreement.

Capital Expenditure on Specified Intangible Assets

Where a trading company incurs capital expenditure (including pre-trading expenditure) on the acquisition or development of certain intangible assets such as patents, registered, designs, brands, copyrights, secret processes, formulae or other secret information concerning scientific experience whether protected by patent or not, such expenditure may be eligible to special capital allowances as prescribed by section 291A TCA 1997.

Trading companies will be entitled to claim capital allowances on qualifying expenditure in line with the company’s depreciation or amortisation rate for accounting purposes. Alternatively the company can elect to claim the capital allowances over a 15 year period.

Should a specified intangible asset on which capital allowances have been claimed be disposed of or ceased to be used in the trade within 5 years after the beginning of the accounting period in which it was first used for the trade, a balancing charge should not arise.

Historically the aggregate amount of capital allowances together with deductions for interest on borrowings relating to specified intangible assets could not exceed 80% of trading income of the however Finance Act 2014 removed this ceiling.

Sasha Kerins is a Tax Partner in Grant Thornton. She advises on a number of areas of taxation across a variety of sectors but principally food and agriculture, construction and e-commerce.

Email: sasha.kerins@ie.gt.com

Greg McAnenly is an Assistant Tax Manager at Grant Thornton specialising is the food and agriculture sector.

Email: greg.mcanenly@ie.gt.com