Research and Development Tax CreditsGetting the most out of your R&D tax credit claimWhether you’re already claiming the R&D 10 key factstax credit or just considering your eligibility, 1. The RD tax credit is worth up to 25% of qualifying expenditure.it’s essential to remember that RD doesn’t 2. The credit is claimed on incremental qualifyingjust happen in the laboratory – quite often expenditure over the amount spent on RD activities in the base year (i.e. an accounting period ending in 2003).it’s the work a company would consider to 3. periods commencing on or after 01/01/2012, Forbe a day-to-day activity: developing a new companies can avail of a volume-based regimeproduct; devising or making improvements (i.e. a 25% RD tax credit for every euro incurred), on the first €100,000 of qualifying expenditure.to a production process; trying out a 4. This credit is available in addition to the tradingnew material to reduce costs. The list is deduction available for RD spend. For a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e.12.5%extensive, and with a potential saving of up corporation tax deduction + 25% RD tax credit).to 25% of qualifying expenditure, it’s worth 5. Expenditure met by grant assistance received from the State, the EU, or EEA does not qualify for the credit.checking if your activities meet the criteria. 6. Eligible expenditure can include expenses (e.g. salaries, overheads, materials consumed, etc.) that are deductibleOverview of the RD tax credit for the purposes of computing corporation tax.The RD tax credit was first introduced in 2004 and since 7. Expenditure incurred on plant and machinery (PM) canthen has been amended and generally enhanced with each be classed as qualifying RD spend. In order to qualify, PMsubsequent Finance Act. must be eligible for wear and tear capital allowances and must be used for the purposes of undertaking RD activities.The tax credit operates on a group basis and is available to 8. Expenditure incurred on RD activities outsourced to acompanies, within the charge to Irish tax, that undertake RD third-party or third level institution can be included in anactivities in the European Economic Area (EEA). In the case of RD tax credit claim, subject to restrictions (see belowan Irish tax resident company, the credit is available only if the for key points).expenditure on the RD is not otherwise available for a tax 9. periods commencing on or after 01/01/2012, key Forbenefit elsewhere. employees who have been actively involved in RD activities can benefit from an employee reward mechanism, effectively allowing them to receive part of their remuneration tax free (see below for key points).You could be entitled to a 10. ompanies have 12 months from the end of the relevant Ccash refund from Revenue accounting period in which to make a claim.worth 25% of your qualifying All of the above are subject to certain conditions, which companies should investigate thoroughly with a tax advisorRD spend prior to submitting an RD tax credit claim.
Use of the credit ‘Key Employee’ reward What is RD?n In the first instance, the RD tax mechanism While there are many activities credit can be used to reduce a For periods commencing on or after carried out by companies that could company’s (or group’s) current year 01/01/2012, key employees who be considered RD, identifying and corporation tax liability. have been involved in RD activities quantifying eligible expenditure forn Where a company does not have can benefit from a new employee the purposes of the RD tax credit sufficient corporation tax liability in reward mechanism, which effectively can often be quite complex. Revenue the current accounting period, it can allows them to receive part of their guidelines state that qualifying RD choose to carry the credit back for remuneration tax free. This is subject activities must: offset against the corporation tax to complicated rules and should be i. systematic, investigative or Be liability in the preceding period. investigated thoroughly; some of the experimental in nature, Any remaining excess can be carried key points to note are: ii. carried out within a Revenue Be forward indefinitely against future n The employee cannot be a director approved field of science and corporation tax liabilities. of, or have a material interest in, technology,n Instead of carrying the credit the company or be connected to iii. Involve basic research, applied forward, a company may elect to such a person. research or experimental have any remaining excess credit n The employee must perform at development, paid as a cash refund by Revenue least 75% of their activities in the iv. Seek to achieve scientific or over three years (complex rules conception or creation of new technological advancement, and apply). The amount of money that a knowledge, products, processes, v. Involve the resolution of scientific company can claim under the above methods, or systems and at least or technological uncertainty. cash back mechanism is limited to 75% of their emoluments must the greater of: qualify for the credit. What fields of science or i. The corporation tax paid by the n The amount of credit that can be technology qualify for company during the period of surrendered to key employees is the credit? 10 years prior to the previous capped at the amount of corporation Allowable fields of science and accounting period, or tax due by the company before technology include: ii. The sum of the payroll tax taking the RD tax credit into n Natural sciences – liabilities for the period in which account, i.e. the company must e.g. food science, software the expenditure on RD was be taxpaying. development, chemical sciences, incurred and the period prior, n The employee’s effective rate of tax biological sciences. subject to conditions. cannot be reduced below 23%. n ngineering and technology – E e.g. mechanical, material,Outsourcing RD Buildings and structures electronic, electrical, andExpenditure incurred on RD activities n Companies who build or refurbish communication engineering,outsourced to a third party or third level buildings or structures for both RD food and drink production.institution can be included in an RD and other activities may claim an n Medical sciences –tax credit claim to the extent that: RD tax credit in respect of the e.g. basic medicine, clinicaln Payment to the third party is limited portion (as appears to the Revenue medicine, health sciences. to 10% of the company’s overall to be just and reasonable) of the n Agricultural sciences – RD spend (5% for a third construction/refurbishment costs e.g. forestry, fisheries, level institution). that relate to RD activities. veterinary medicine.n The third party to whom the RD n minimum of 35% of the building A is outsourced does not claim an must be used for conducting RD RD tax credit for the work it has activities for a 4 year period. been contracted to carry out. The n The building must be used for company must notify the third party RD for a period of 10 years. provider in writing that it cannot also n An RD tax credit of 25% of claim the RD tax credit for the relevant expenditure can be relevant RD. claimed in full in the year in whichn For periods ending on or after the expenditure was incurred. 01/01/2012, companies can claim the greater of the current percentage based limits (10% or 5% of the company’s in-house spend) or €100,000. The total amount claimed must not exceed the qualifying expenditure incurred by the company itself in the period.
Examples of activities that could qualify for the RD tax credit Sector Company Qualifying Activities Benefit Software and Electronics Software Co., an Irish Software Co. developed new techniques to automate Software Co. has subsidiary of a US the identification of spam e-mail to a received a cash refund multinational in the very high degree of confidence whilst ensuring from Revenue of circa software sector. that legitimate e-mail is not incorrectly classified €300,000. as spam. Financial Services Bank Co., an Irish Bank Co. planned to implement a new accounting Bank Co. has received subsidiary of a US application for its fund administration business. a tax credit of circa multinational in the fund A third party off-the-shelf application was acquired €350,000. administration sector. for this purpose and Bank Co. undertook significant development work to integrate the application with the in-house legacy back-end systems. Food and Drink Drink Co., an Irish Drink Co. developed a low cost version of an existing Drink Co. has received company in the carbonated fruit juice drink. Their aim a cash refund from drinks sector. was to reduce the formulation cost of the drink Revenue of circa by replacing the higher cost ingredients with lower €150,000. cost replacements, while maintaining the product characteristics of the previous version, including taste, colour, sweetness, etc . Biotechnology, Pharma Co., an Irish Pharma Co. was attempting to develop a new drug Pharma Co. has received Pharmaceuticals subsidiary of a US with an Active Pharmaceutical Ingredient (“API”) a tax credit of circa €1m. and Medical Devices multinational in the which would be effective against a specific strain of a pharma sector. virus. Engineering, Energy Wind Co., an Irish Wind Co. designed enhanced rotor blades for their Wind Co. has received and Natural Resources company in the wind turbines in order to achieve a streamlined a cash refund from renewables sector lightweight blade design; this would maximise energy Revenue of €120,000. output and efficiency whilst remaining strong enough to handle frequent changes in torque caused by changes in wind speed.Common errors Implications of an How can KPMG help you?n Eligible activities have been incorrect claim We can help you to address any issues overlooked and your claim may n Under-claiming – You may not have relating to your RD tax credit claim, be undervalued. claimed the full cash value that you such as:n Your entitlement to claim has not are entitled to and are missing out n hat RD activities are you W been established properly; this is a on a valuable refund. undertaking at present and would complex tax technical area which n Over-claiming and/or filing an they qualify for the RD tax credit? interacts with other tax legislation. unsupportable claim – If your claim n How do you identify expendituren RD activities have not been is audited by Revenue, you may incurred on the qualifying activities, properly identified and/or be leaving yourself open to both internally and outsourced? documented in accordance with repayment of the credit in addition n What supporting documentation is relevant tax legislation and Revenue to interest, penalties and, in required and how to best capture guidelines. extreme cases, publication on the qualifying activities?n Insufficient supporting list of tax defaulters. n Are you maximising your ability to documentation in place to justify n Revenue is taking an increasingly qualify for the credit? your claim. hard line with respect to issues n How do you defend your claim ifn Incorrect inclusion and/or treatment arising from RD tax credit claims. audited by Revenue? of certain types of expenditure. It is therefore very important that all n Are you utilising available reliefsn The claim has been filed with claims should be prepared strictly appropriately within the company Revenue in an incorrect manner. in accordance with the legislation, or group? tax briefings, e-briefs, Revenue n Might your future RD activities Guidance, practice and precedents. qualify? o make sure you’re making the most of your RD taxTcredit claim and are fully prepared for a Revenue audit,contact our team for a free health check