WITH THE CONTINUED increase in research and development (R&D) spending by SMEs, it is imperative that company owners and directors are aware of, and avail of, all support available to them.
One of the key supports available to reduce the cost of carrying on this work is the R&D tax credit scheme.
What is the R&D tax credit?
The R&D tax credit provides a 25% credit on eligible expenditure to companies. The credit is in addition to the normal 12.5% tax deduction for qualifying expenditure.
The combined effect of these provisions is that it is possible to obtain tax relief at an effective rate of up to 37.5% of the R&D spend.
Profit-making companies will see a direct reduction in their tax liability, whilst loss-making companies can claim the credit as a cash refund in three instalments. Either way, the credit brings a cash benefit.
Who can claim it?
The credit is only available to qualifying companies carrying on a trade and subject to Irish corporation tax. The claimant company must, through its employees, undertake qualifying R&D activities within the European Economic Area (EEA).
What R&D activities qualify for the relief?
Qualifying R&D activities are those that are systematic, experimental or investigative in nature.
The work carried out must seek to achieve scientific or technological advancement in a field of science or technology and should involve a resolution of scientific or technological uncertainty.
The activity may be either basic or applied research, or even experimental development – the latter being the most frequent type of R&D for tax credit claims.
The credit is available to companies based in Ireland in respect of their R&D activities. It is a credit that applies to the activities undertaken by companies across many industries.
Here are some examples of qualifying activities across various industries:
- Construction and engineering - streamlining manufacturing processes with automation or developing new products such as easier-to-process building materials;
- Medical devices - the development of an advanced medical device or improving the performance of an existing medical device;
- Food and drink - developing a new recipe or reducing the risk of spoilage, waste or contamination;
- Pharmaceuticals – the development of a drug formulation or development of improved cleaning procedures;
- Agriculture - developing technology to protect crops from disease or developing new techniques to increase yield and production efficiency;
- Aviation or aerospace industry - developing new aircraft and related equipment or developing digital systems to replace legacy analogue systems.
For companies considering whether the R&D credit may be of benefit, it is important to be aware of the activities for which related spend does not qualify for the credit.
Common examples of activities that do not qualify include market research, sales promotions, routine data collection, routine testing and the application of a publicly known technology.
What costs can be included in the credit calculation?
To qualify for the R&D tax credit, the spend must be incurred by the company wholly and exclusively in the carrying on of its qualifying activity.
Qualifying costs may include direct salary costs of employees involved in qualifying R&D activities, materials used in the process, a portion of the cost of plant and machinery used and a portion of certain overheads such as light, heat and power.
Payments made to unconnected contractors who carry out qualifying R&D activity, such as work done by universities, on behalf of the claimant company may be included in the claim subject to strict limits.
Deadline for claiming the credit
The R&D tax credit claim must be submitted to Revenue within 12 months from the end of the accounting period to which the claim relates.
This means that claims for companies with an accounting year ending 31 December 2015 must be submitted to Revenue by the end of December 2016.
It is vital that companies maintain contemporaneous documentation in support of the claim. This means that documents should be available from the time that the R&D activity was undertaken and all entries should be made on a timely and consistent basis.
Ideally, this documentation should include details of project planning, project tracking and project time recording.
It should also detail the objectives of the specific R&D activity, uncertainties, advancements sought, hypothesis, conclusions and experiments carried out to demonstrate the systematic approach adopted.
Revenue places great reliance on this documentation when carrying out verification checks and audits of R&D tax credit claims.
Earlier this year, Revenue introduced welcome concessional treatment for the R&D tax credit whereby, as a rule, it will not seek to challenge the scientific or technical merits of any claim where:
- An Enterprise Ireland or IDA R&D grant was received in respect of the project;
- The R&D tax credit claimed in any given accounting period (of not less than 12 months) is €50,000 or less;
- The project is undertaken in a prescribed field of science or technology, as defined in the regulations;
- The company is a micro or small-sized enterprise.
The R&D tax credit is a very attractive tax relief for relevant companies and one that can be viewed as an attractive source of finance to support this activity.
However an increase in Revenue interventions means that companies need to be very aware of documenting evidence supporting the claim.
For companies who believe the R&D tax credit may apply to them, it is recommended that they seek the assistance of a professional.
Mairéad Hennessy is the principal at Taxkey.ie.
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