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The research and development tax credit in detail
What the R&D tax credit is, how it works, and how to qualify
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Article Posted date15 February 2023
7 min read
Whether you are already claiming the R&D tax credit or just considering your eligibility, it is essential to remember that R&D does not just happen in the laboratory – quite often it is the work a company would consider to be a day-to-day activity: developing a new product; devising or making improvements to a production process; trying out a new material to reduce costs. The list is extensive, and with a potential saving of up to 25% of qualifying expenditure, it is worth checking if your activities meet the criteria.
Overview of the R&D tax credit
The R&D tax credit was first introduced in 2004 and since then has been amended and generally enhanced with each subsequent Finance Act.
The tax credit operates on a group basis and is available to companies, within the charge to Irish tax, that undertake R&D activities in the European Economic Area (EEA) or the UK. The credit is available for expenditure which is allowable for a corporate tax deduction in Ireland, or would be so allowable but for the fact that for accounting purposes it is capitalised as an intangible asset.
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The research and development (“R&D”) tax credit...
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10 key facts
The R&D tax credit is worth up to 25% of qualifying expenditure.
This credit is available in addition to the trading deduction available for R&D spend. This can result in a net subsidy of 37.5% (i.e. 12.5% corporation tax deduction + 25% R&D tax credit).
Eligible expenditure can include expenses (e.g. salaries, materials consumed, overheads etc.) that are deductible for the purposes of computing corporation tax.
Expenditure incurred on R&D activities outsourced to a third-party or third-level institution can be included in an R&D tax credit claim, subject to restrictions (see below for key points).
Expenditure incurred on Plant and Machinery (P&M) can be classed as qualifying R&D spend. In order to qualify, P&M must be eligible for wear and tear capital allowances and must be used for the purposes of undertaking R&D activities.
Expenditure on construction or refurbishment of a building used for qualifying R&D activity may also be classed as qualifying R&D spend. The credit is available for expenditure provided a number of conditions are met, for example the R&D activities carried on in that building over a period of 4 years must represent at least 35% of all activities carried on in the building.
Expenditure met by grant assistance received from the State, the EU, or EEA does not qualify for the credit.
Companies have 12 months from the end of the relevant accounting period in which to make a claim.
Key employees who have been actively involved in R&D activities can benefit from an employee reward mechanism, effectively allowing them to receive part of their remuneration tax free (see below for key points).
Generally Revenue has 4 years from the end of the year in which the claim is made to commence an audit.
All of the above are subject to certain conditions, which companies should investigate thoroughly with a tax advisor prior to submitting an R&D tax credit claim.
At the time of publication, the small & micro companies enhanced regime, which was announced in Finance Act 2019, has yet to receive the required Ministerial order, which is delayed due to Covid-19.
You could be entitled to a cash refund from Revenue worth 25% of your qualifying R&D spend
Use of the credit
In the first instance, the R&D tax credit can be used to reduce a company’s (or group’s) current year corporation tax liability.
Where a company does not have sufficient corporation tax liability in the current accounting period, it can choose to carry the credit back for offset against the corporation tax liability in the preceding period. Any remaining excess can be carried forward indefinitely against future corporation tax liabilities.
Instead of carrying the credit forward, a company may elect to have any remaining excess credit paid as a cash refund by Revenue over three years (complex rules apply). The amount of money that a company can claim under the above cash back mechanism is limited to the greater of:
The corporation tax paid by the company during the period of 10 years prior to the previous accounting period, or
The sum of the payroll tax liabilities for the period in which the expenditure on R&D was incurred and in the prior period, subject to conditions.
Outsourcing R&D
Expenditure incurred on R&D activities outsourced to a third party or third level institution can be included in an R&D tax credit claim, subject to certain rules:
Payment to a third party is limited to the greater of 15% of the company’s overall R&D spend or €100,000.
Payment to a third level institution is limited to the greater of 15% of the company’s overall R&D spend or €100,000. For accounting periods ending before 22 December 2019, the relief is restricted to 5%.
The total amount claimed must not exceed the qualifying expenditure incurred by the company itself in the period.
The company must notify the third party provider in writing that it can
I have been involved in alot of these kind of projects and knew nothing about this.
‘Key Employee’ reward mechanism
Key employees who have been involved in R&D activities can benefit from a ‘key employee’ reward mechanism, which effectively allows them to receive part of their remuneration tax free. This is subject to complicated rules and should be investigated thoroughly; some of the key points to note are:
The employee cannot be a director of, or have a material interest in, the company or be connected to such a person.
The employee must spend at least 50% of their time on R&D activities (i.e. the conception or creation of new knowledge, products, processes, methods, or systems) and at least 50% of their emoluments must qualify for the credit.
The amount of credit that can be surrendered to key employees is capped at the amount of corporation tax due by the company before taking the R&D tax credit into account, i.e. the company must be taxpaying.
The employee’s effective rate of income tax cannot be reduced below 23%.
In the event of a reduction in the credit amount following a Revenue audit, the onus is on the company to repay the credit surrendered to key employees