Research & Development - Question and Answer - Mazars - Ireland

Q: I have heard that it is possible to claim tax relief on certain types of research and development (R&D), but I am not sure whether my company would qualify for the scheme or how to go about applying. Can you help me?

Answer

The research and development tax credit (RDTC) was first introduced in Ireland in 2004, to promote and incentivise Irish companies engaged in technological and scientific processes either in the State or in the EEA.

Recent changes have enhanced the benefits of the RDTC. Such changes included the increase in the credit from 20% to 25% on incremental spend and the possibility of a cash refund of the credit from the Revenue Commissioners.

The common misconception is that the RDTC is only available to companies in the pharmaceutical and medical sectors or laboratory type companies, it may also be available to companies which do not operate in these areas.

The RDTC is available to any company which can demonstrate that they are engaged in systematic, investigative or experimental activities in a field of science or technology (which includes sectors like engineering, agricultural sciences, medical sciences, natural sciences to name but a few). The R&D which is being carried out must be basic research, applied research or experimental development (i.e. development of products for commercial application) and must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.

The expenditure included as part of a qualifying RDTC claim is the same expenditure which may also be included in a company’s standard corporation tax compliance calculation thus providing a total deduction of 37.5% (i.e. 12.5% corporate tax deduction + 25% RDTC).

It is important to note that in calculating the RDTC claim for the current year that only the incremental spend over the 2003 base year will qualify. e.g. if in 2003 the company’s R&D spend was €100,000 and the R&D spend in 2010 was €500,000 then the amount on which the RDTC is available is on €400,000.

Any expenditure which is incurred wholly and exclusively for the qualifying R&D activity or project may be included as part of the RDTC claim. In addition it may be possible to include some ancillary costs (such as rents, light and heat) on a “just and reasonable basis”, such as machine hour basis or based on number of staff engaged in R&D over the total number of staff etc.

Expenditure which may qualify includes, plant & machinery, fixture & fittings, building costs (separate treatment applies), raw materials, director, staff costs, sub contracted R&D costs (subject to restrictions), to name but a few.

If the company has a current year corporation tax liability, it may use the 25% RDTC to reduce it. If there is any unused amount it can be carried back against the previous years liability and a refund obtained. If an excess still remains then this can be refunded to the company over a three year period (subject to certain restrictions). In essence, provided certain conditions are satisfied, a company incurring losses may be able to get a refund of the credit. This is of particular benefit to companies which are in a start-up phase who frequently incur losses.

The RDTC claim must be made within 12 months of the company’s accounting year end in which the expenditure is incurred but is normally made at the time the corporation tax return is due to be submitted. There is no formal RDTC tax return as it forms part of the corporation tax return, if the claim is made after the return has been submitted then a letter to Revenue providing the relevant details will suffice. Appropriate records must be maintained in order to substantiate the claim in the event of an enquiry by Revenue.

This Question and Answer by Gerry Vahey appeared in the Sunday Business Post on the 3rd April 2011