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Research & Development Tax Credits - The necessary detail for FAE Tax Elective, P6 ACCA and P2 CPA exams

Posted on: Monday, March 07, 2016

Tax Credit for Research & Development (“R&D”) Expenditure

A company and not a sole trader is entitled to a tax credit equivalent to 25% of qualifying R&D expenditure incurred in a particular accounting period which can be offset against the corporation tax liability.



For accounting periods beginning on or after 1st January 2015, the base year restriction has been removed which means the credit is now available on a volume basis as opposed to an incremental basis.



The 25% Tax Credit is in addition to the normal Case I deductions for expenditure incurred against trading income which may result in a corporation tax refund. For a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e. 12.5% corporation tax deduction + 25% R&D tax credit). Please be aware, however, that certain restrictions apply to limit the extent of the refund.




For accounting periods beginning on or after 1st January 2015, the base year restriction has been removed which means the credit is now available on a volume basis as opposed to an incremental basis.



The 25% Tax Credit is in addition to the normal Case I deductions for expenditure incurred against trading income which may result in a corporation tax refund. For a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e. 12.5% corporation tax deduction + 25% R&D tax credit). Please be aware, however, that certain restrictions apply to limit the extent of the refund.





What are R&D Activities?

Revenue guidelines state that qualifying R&D activities must:

• Be systematic, investigative or experimental in nature,
• Be carried out within a Revenue approved field of science and technology,
• Involve basic research, applied research or experimental development,
• Seek to achieve scientific or technological advancement, and
• Involve the resolution of scientific or technological uncertainty

What are “qualifying” R&D Activities?

• Natural sciences including food science, software development, chemical sciences, biological sciences. „
• Engineering and technology including mechanical, material, electronic, electrical, and communication engineering, food and drink production. „
• Medical sciences including basic medicine, clinical medicine, health sciences.
• Agricultural sciences including forestry, fisheries, veterinary medicine.

In an exam question, once you've outlined the qualifying "R&D" Activities as above, tell the Examiner which of the above specifically relates to the company's trading activity, as outlined in the exam question, and whether it will qualify as R&D activities.  There is no point in just listing the criteria for the relief you must always tell the Examiner whether or not the trading activity qualifies for the relief for full marks.




Points in relation to “qualifying” expenditure:

1. Expenditure covered by grant assistance received from the State, the EU, or EEA does not qualify for the credit.

2. Eligible expenditure includes expenses such as salaries, overheads, materials consumed, etc. which are allowable trading deductions for the purposes of computing corporation tax.

3. Expenditure incurred on plant and machinery may also qualify as R&D expenditure. To do so, however, it must be eligible for wear and tear capital allowances and must be used for the purposes of R&D activities.

4. Expenditure incurred on R&D activities outsourced to a third-party or to third level institutions may also qualify as R&D expenditure for the purposes of the R&D Tax credit subject to certain conditions:

• 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/university is limited to the greater of 5% of the company’s overall R&D spend or €100,000. „
• 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 cannot also claim the R&D tax credit for the work it has been contracted to carry out.

5. Companies who build or refurbish buildings or structures for both R&D and other activities may claim an R&D tax credit in respect of the portion of the construction and/or refurbishment costs that relate to R&D activities.

• To qualify, the company must be entitled to claim industrial buildings capital allowances on the building. It’s important to bear in mind that the cost of the site is excluded.
• A minimum of 35% of the building must be used for conducting R&D activities for a four year period.
• The building must be used for R&D for a period of ten years.
• The relief will be clawed back if the building is sold or ceases to be used within ten years by the company for research and development activities or for the same trade as when the building is first brought into use.
• An R&D tax credit of 25% of relevant expenditure can be claimed in full in the year in which the building is first put into use for the purpose of the trade.

The order of offset of the R&D Tax Credit is as follows:

1. Firstly against the current period’s corporation tax liability.
2. Secondly, where the company does not have sufficient corporation tax liability in the current accounting period, that company can make a claim to carry back the unutilised portion of the tax credit against the corporation tax liability of a preceding accounting period of corresponding length.
3. Thirdly, if any portion of the credit remains after making this claim the company can make a claim under Section 766(4B) for a cash refund payment of this excess in three instalments. Please be aware that this payment is subject to a cap (see below).
4. Finally, any remaining portion of the R&D Tax Credit will be carried forward and offset against the corporation tax liability of the future accounting periods

The amount of cash refund that a company can claim under (Section 7664B) is limited to the greater of:

1. The corporation tax paid by the company during the period of ten years prior to the previous accounting period i.e. prior to the period in which Section 766(4A) TCA 1997 relief is claimed. It’s important to bear in mind that these payments are reduced by any claims already made under Section 766(4B)TCA 1997 in those earlier periods or
2. The sum of the payroll tax liabilities for the period in which the expenditure on R&D was incurred as well as the prior period’s payroll, subject to restrictions if the company has previously made a claim based on its preceding payroll.

Points to keep in mind

1. The amount of any payment made by the Revenue Commissioners following a Section 766(4B) claim by a company will not to be treated as income of the company and therefore not included in the CT computation.
2. Instead it will be deemed to be a refund of corporation tax.
3. By doing this, Revenue Commissioners can offset the payment against any outstanding tax liabilities of the company.
4. The company must make a claim for the R&D Tax Credit within twelve months of the end of the accounting period in which the expenditure was incurred.
5. If possible the claim should be made when filing the corporation tax return of the relevant accounting period.
6. Relief can be claimed for expenditure incurred prior to the commencement of the company’s trading activity.

Very best of luck with your studying.