What are R&D tax credits and how can your business benefit from them?
The R&D tax credit is an incentive for qualifying Irish tax resident companies (or branches) or groups of companies that undertake qualifying R&D activities within the European Economic Area (EEA). The incentive is worth 25% of qualifying R&D expenditure incurred and can be accessed via an offset against corporation tax or, where conditions are met, as a cash refund.
The credit was introduced in 2004 and after a slow start to the take-up of the tax credit regime, more and more companies are now claiming the R&D tax credit. Latest statistics available show that in 2016 the Exchequer supported over 1,500 Irish businesses by providing €670m in tax credits. These figures could be much higher as not all businesses are aware of the incentive or appreciate that their development activities qualify for R&D tax credits.
R&D Tax credit – key features
The principal features of the R&D tax credit regime are as follows:
- All companies, within the charge to Irish tax, that undertake R&D activities within the EEA can apply for the tax credit. In the case where the company is an Irish tax resident.
- The tax credit can be claimed on eligible revenue and capital expenditure such as employee costs, consumable overheads, third-party costs and plant & machinery that is incurred wholly and exclusively by the company in the carrying on of qualifying R&D activities.
- The tax credit can be claimed on expenditure incurred on buildings where the R&D activities undertaken in the building, over a four year period, represent at least 35% of all activities carried on in the building.
- In the case where a company does not have sufficient corporation tax against which to claim the credit in a given year, the tax credit may be carried forward indefinitely, carried back to the prior year or surrendered to Revenue for cash payments. If surrendered for cash payments, these will be received in three instalments over a period of 33 months from the end of the period in which the expenditure was incurred
A multi-disciplinary approach is ‘best practice’ when claiming R&D tax credits
The R&D tax credit, while being a tax credit, is firmly based in science and technology. In the preparation of an R&D tax credit claim, input is usually required from financial, tax and scientific/technical personnel. Input is essential from scientific/technical personnel to determine that the activities they conduct meet the key scientific criteria as set out in the R&D legislation. The financial/tax personnel will attribute expenditure to these activities and ensure that the tax technical requirements are met.
Claiming the tax credit
The R&D tax credit regime operates on a self-assessment basis, whereby the company, after carrying out the necessary due diligence, makes a claim for the amount of tax credit it is due. The claim is usually made in the company’s corporation tax return for the accounting period. This is generally done via Revenue’s Online Service (“ROS”). Where the return has already been filed, the claim may be made via an amendment to the corporation tax return (generally via ROS) within 12 months from the end of the accounting period in which the expenditure on R&D is incurred.
Revenue enquiries and audits
Revenue enquiries and audits are often multi-disciplinary and often involve a Revenue appointed scientific expert who will review the activities claimed to assess whether they meet the legislative definitions of R&D and that enough relevant and contemporary evidence is available to demonstrate the eligibility of the activities. Additionally, an audit or enquiry will also involve a financial/tax review to ensure the amounts claimed can be substantiated/evidenced and are thus properly claimed.
Seek professional advice when making an R&D tax credit claim
The legislation surrounding R&D tax credits is complicated and one must keep in mind that Revenue will focus on four key elements when undertaking an audit:
- From a tax perspective, is the company entitled to claim?
- Do the activities the company has carried out meet the criteria required to be qualifying R&D activities?
- Does the expenditure incurred on those activities qualify for the R&D tax credit?
- Is there sufficient, relevant, contemporary evidence to support 1 to 3 above?
A specialist R&D tax advisory firm that employs technical, tax and cost accountants is essential for navigating through the myriad of R&D tax legislation. In addition, a specialist will ensure that all eligible activities and costs are captured. They will also be able to handle any Revenue enquiry or audit.