The Irish Farmers Journal has recently been contacted in relation to companies offering to help farmers reduce their tax bills through the use of research and development (R&D) tax credits.

Farmers have reported getting unsolicited calls outlining the apparent opportunities available for tax savings in the space. There is an element of pressure then applied to those farmers to go for the tax credit. The firm involved takes a fee, often based on the size of the saving made on any R&D tax credit achieved.

However, for the farmer, there is a good chance that is not the end of the story. Revenue has increased focus on R&D tax credits and rejections of applications will lead to fines and interest charges.

What is an R&D tax credit?

Research and development tax credits were introduced in 2004 to allow companies to reduce their tax liability when engaging in scientific research. The rate since 1 January 2024 has been set at 30%.

The Revenue has strict rules around what research spending can count towards the tax credit. It must:

Companies which are making an R&D claim for the first time must file a pre-filing notification at least 90 days before the claim for the credit is made. The credit is only available to companies. Sole traders, partnerships and personal income tax payers do not qualify for the credit.

Revenue have approved four fields of research: natural sciences; engineering and technology; medical sciences; and agricultural sciences. Within agricultural sciences, Revenue includes “forestry, fisheries and allied sciences including agronomy, animal husbandry, fisheries, forestry, horticulture, and other allied subjects” as activities that may qualify for the R&D tax credit.

Routine quality control and testing do not qualify for the credit.

The burden of proof that research has actually been undertaken is quite high. Revenue will want evidence that R&D activities are undertaken in a planned, methodical way using known methodologies. Detailed records and contemporaneous documentation must be kept which reflect the life-cycle of the research project.

While Revenue is interested in the outcomes, they are more interested in the life cycle of the project to ensure that the research had clear goals at the outset, the experimentation followed those goals and any changes along the way follow a logical sequence. The failure of the research to lead to a breakthrough does not mean a tax credit will be rejected.

What happens when a R&D tax credit is rejected?

The Tax Appeals Commission has an example of a case in the agricultural space which illustrates how tight the qualifying criteria for an R&D tax credit is, and how costly it can prove when a claim is ultimately rejected.

The report from the appeals commission (number 162TACD2023 if you want to read all 27 pages) redacts the name of the company involved, but does confirm it is involved in animal breeding. The company put in a claim for R&D tax credits totalling €42,647 in 2017 based on three research projects.

At the appeal both the company and Revenue produced independent expert witnesses to argue their cases. They disagreed considerably about the science and research value of the projects

Revenue rejected the claim and reassessed the company’s corporate tax liability in 2020, and issued an amended notice of assessment for €133,929 to the company. The appeal was heard in September 2023.

The company had claimed credit for three separate research projects. The first was a nutritional trial, which looked at the effects of different feed additives on animal performance. The second was to look at both expanding the volume in semen collections as well as extending the life of semen collected by up to 10 days. The third project was around genotype development.

At the appeal both the company and Revenue produced independent expert witnesses to argue their cases. They disagreed considerably about the science and research value of the projects.

The decision of the Commission came down to whether the research projects satisfied what is referred to as the “science test”. The Commission accepted that the research was valuable to the appellant, and by extension its customers, but that it would not lead to an advancement in general understanding.

The Commission ultimately ruled in favour of the Revenue, stating that the projects undertaken “did not seek to achieve scientific or technological advancement, and did not involve the resolution of scientific or technological uncertainty” as required under the rules set out by Revenue.

The Commission said that the evidence provided suggested that the company was involved in “routine engineering” rather than the resolution of scientific or technological uncertainty, leaving the company with a considerable tax bill, plus interest and fines.

Crackdown

In the United Kingdom the use of R&D tax credits has become more widespread in recent years. HMRC, the UK revenue service, has increased its focus on the sector and launched coordinated operations to tackle suspected abuse of the research and development tax relief system.

Perhaps it is coincidental, but the crackdown in the UK has coincided with an apparent rise in the number of firms in Ireland offering services around R&D tax credits. Some of the brochures seen by the Irish Farmers Journal are clearly produced by artificial intelligence and linked to companies where the Irish address is one shared with hundreds of other companies.

This in no way means that there are not companies in the R&D tax credit space which can help navigate the tax system.

There are many in Ireland which are long-established with deep knowledge of the sector. Those companies, however do not go around cold-calling farmers to tell them that they are engaging in research they knew little or nothing about. They do not put farmers under pressure to put in claims as soon as possible, and their fee structure is generally not based around how big a tax credit claim is.

Comment

R&D tax credits are a valuable measure which encourages companies to engage in research which can lead to scientific breakthroughs.

However, the criteria used by Revenue to decide if research qualifies is very stringent, so there is generally a lot of work involved in submitting a claim.

Fundamentally, there is nobody involved in research which would qualify for tax relief who does not know they are involved in doing that science.

Therefore, if a farmer is cold-called and told they are engaged in such research, they almost certainly are not.

Trying out novel feeding methods, cropping rotations or advances in AI or robotics might be cutting edge technology, but they, by themselves, will not meet the standard required by Revenue.

With tax authorities taking an ever-closer look at claims, only the best prepared are likely to be approved.

If a farmer is genuinely doing research, then getting an established research and development advisor on board as early as possible is important. In that case however, it will be the farmer calling the advisor, not vice-versa.

If a farmer has been cold-called or is being pressurised to make a claim then it is most likely that they are not entitled to what they will be claiming for and will face rejection by Revenue as well as interest and fines.