Research & Development (R&D) Tax Credits
The R&D Tax Credit scheme was introduced by the Finance Act 2004. Significant changes have been made to enhance the tax credit since its introduction.
A 25% R&D tax credit is available for companies carrying out qualifying R&D activities in Ireland.
- The credit can be claimed on an incremental basis, relative to the base year (2003).
- For accounting periods commencing after 1 January 2012, the base year is void in calculating the tax credit on the first €100,000 of R&D expenditure.
- All claims must be submitted within 12 months from the end of the accounting period.
- The R&D Tax Credit is available to offset against corporation tax (CT). This is in addition to the 12.5% corporation tax deduction at the standard rate.
- Companies that are not in a CT paying position – such as loss making companies can claim a cash refund.
- The refund is payable over a period of 33 months (subject to certain criteria)
- The R&D Tax Credit must be prepared on a group basis.
- The R&D activities must be carried out by a company in the European Economic Area (EEA)
- Qualifying expenditure must be net of any grants which relate to the R&D activities being carried out.
In summary there exists two aspects to current legislation which in summary can arise as follows:
The first is aimed at qualifying companies who have declared a trading profit and have an Irish Corporation Tax Liability. The applicable 25% R&D tax credit reduces the corporation tax charge. Where the tax credit amount is in excess of current year Corporation tax, the excess amount will be repaid to the company as a cash refund over a period of 33 months. ( Three separate periods in instalments of circa 1/3 )
The Second is aimed at qualifying companies who have declared a trading loss and are not paying Irish Corporation tax. The applicable 25% R&D tax credit is available as a cash refund. ( termed payable tax credit ). Again this refund is available in increments over a 33 month period. (essentially over 3 separate periods in instalments of circa 1/3) A number of claim constraints apply in this regard but same can be managed with careful consideration and advice.
Activities in the areas of Technology, Pharma, Medical Device/ Product Engineering and Food/ Ingredient manufacturing often demonstrate obvious “white coat” R&D Tax Credit suitability. However ancillary activities within these areas often deemed internally as “normal / standard” activities may & very often actually qualify for inclusion in a RDTC claim.
Qualifying Projects or Activities must demonstrate the following to be included:
1. Systematic, Investigative or Experimental activities :
- Must be planned, logical and methodical. Detailed records must be maintained. NB – “R&D Projects” with technical goals, progress reports & results, managed & directed by suitably qualified experts.
2. In a field of Science or Technology:
- Natural Sciences/ Engineering/ Medical Sciences/ Agricultural sciences.
3. R&D must fall under one of the following categories:
- Basic Research: New experimental work undertaken without specific practical application in mind
- Applied Research: Possible commercial applications for basic research findings
- Experimental Development: New or improved products/ devices for commercial application
4. Must seek to achieve Scientific or Technological Advancement and involve the resolution of Scientific or Technological Uncertainty
5. In addition there exists standard Irish taxation legislative requirements, however where a company is carrying out a trade in Ireland and is chargeable to Irish tax these are, in most cases, a technical formality.
Where an expense is incurred in full as part of a qualifying activity / project it may be included as part of RDTC claim. Plant & Machinery, Fixtures & Fittings, Building cost (separate treatment applies), Raw materials, Direct Staff Costs, Management Costs, Sub Contracted R&D costs (constraint applies), Overheads etc.
This list is not exhaustive eg. : Heat & light costs attributed to a unit part of which is used for qualifying R&D projects may be in included. In this regard a calculation of apportioned use would apply.
Administration & Revenue Oversight
A RDTC claim is made via the Corporation tax return (CT1) and must be made within 12 months of the accounting year end of a company.
If a company has not made a claim to date it is very important that great care is taken to ensuring the calculation for the 2003 base year is correct, accurate and verifiable. This figure cannot be reduced or changed, apart from in very exact & rare circumstances, and therefore this figure will form the foundation of any future claims in this regard.
It is important that very detailed project notes and records are kept in respect of any qualifying RDTC claim.
Revenue may choose to audit any claim in this regard and when they do so, they investigate on both a tax technical and a scientific qualification level. In addition they may call an industry and suitably qualified relevant expert to review the claim and provide expert opinion as to qualification.
Required Documentation and Project Management
Strict regulations are in place to ensure potential claimants can demonstrate adequately a systemic & organised approach to qualifying projects and activities. It is vital that going forward all new, and potentially qualifying R&D projects, follow a pre-defined and “standard” model of organisation and structuring.
It is expected, that given the significant current interest in the RDTC area and the obvious general increase in reporting requirements and public accountability that claims in this regard will need to be completely correct, complete and accurate to ensure qualification.
However it is our view that correct RDTC documentation, administrative systems and strict project management /oversight will add significantly to the potential size and quantum of potential RDTC claims.
A number of improvements to Ireland’s R&D tax credit were announced in Budget 2012 and include the following:
- The first €100,000 of qualifying R&D expenditure of all companies will benefit from the full 25% tax credit on a volume basis, irrespective of whether or not there is an increase on the base year R&D expenditure;
- To improve the scheme for SMEs, the outsourcing arrangements for R&D purposes will be improved in a targeted manner to allow the greater of the existing percentage arrangement or €100,000;
- Companies will have the option to use some portion of the R&D credit to reward key employees who have been involved in the development of R&D. In recognition of the difficulties caused for many businesses by the cessation of the patent exemption scheme, the R&D tax credit can now be used as an employee incentive for research staff. Tax exempt bonuses can now be paid by companies from their R&D tax credit to employees. Employees will continue to pay full tax liability on all other income and this change will come at no additional cost to the Exchequer.
If you would like to request an R&D Tax Credits overview or further information on how we can assist your company, or would like us to call you directly to discuss your particular circumstances, please email us at firstname.lastname@example.org or Tel: 01 2135910.