With the increased demand to compete in the ever changing environment of a modern economy, a key driver in the pursuit of innovation is the availability of complimentary tax incentives. One such incentive is the research and development (R&D) tax credit which is designed to increase Ireland’s attractiveness as a world leading innovation hub. Economic theory provides a strong justification for government support for R&D, including subsidies and incentives for business research. Without such support, companies are likely to underinvest in research (from the standpoint of the economy as a whole) because the results of R&D cannot be fully appropriated by the investing firm1.
There is a general consensus from studies of experience in different countries that additional tax relief for R&D expenditure results in higher levels of expenditure than would otherwise occur2. In light of this, a company or a group of companies may be entitled to claim an R&D tax credit. The benefits of the R&D credit are not restricted to profitable companies who are paying corporation tax; loss making companies can also realise a cash value for their R&D commitment.
Business expenditure on R&D
Competition among nations to attract business R&D and to develop technology intensive industries is growing1. As part of the Government’s strategy for meeting R&D targets under the Europe 2020 strategy, Ireland is aiming to invest 2 per cent of GDP in R&D by 20203. One such mechanism to drive this strategy is the R&D tax credit. Whereby, the R&D tax credit (Sections 766, 766A and 766B of the Taxes Consolidation Act 1997) provides a provision for a tax credit for certain expenditure on R&D activities, plant and machinery and buildings.
In reference to the recent CSO analysis (June 2015)4, results from the 2013 – 2014 Business Expenditure on Research and Development survey show that in excess of €2 billion was spent on R&D activities by enterprises in Ireland in 2013, with €2.1 billionn estimated for 2014.
The link between R&D in the Irish economy and economic growth has also been explored. According to the European Commission growth model, the increase in business expenditure on R&D results in a permanent increase in GDP of 0.22 per cent in the long-run3.
What is the R&D tax credit?
Investment in R&D is a considerable enabler of scientific and technological progress and economic growth. The goal of the R&D tax credit is to encourage R&D investment by indigenous and foreign owned firms alike by rewarding qualified research. From our experience in Mazars, there are there questions that are commonly asked;
- How does the credit work? The R&D credit works by providing a company with a credit calculated as 25 per cent of qualifying R&D expenditure. In addition to the 12.5 per cent trading deduction, this effectively means that the company can benefit from an effective tax benefit of 37.5 per cent on its R&D spend.
- What are qualifying expenditures? This is expenditure incurred in developing processes which are systematic, investigative and experimental and as such qualify for the credit as set out by the guidelines issued by Revenue. Eligible expenditure includes direct and indirect costs so long as they are incurred in the carrying on of R&D in addition to capital expenditure on related plant and machinery. Basically, the company must be incurring expenditure on qualifying activities which are seeking to achieve a scientific or technological advancement through the resolution of a scientific or technological uncertainty in a 12 month accounting period.
- Why would we bother with the credit? Primarily, the principle gain to a company claiming the R&D tax credit is cash. This credit should not be undervalued or understated as cash is vital to the sustained health of any business. However, value can also be received for the R&D tax credit in a number of different ways, such as offsetting the tax credit against Corporation Tax, as a refund by reference to payroll taxes and Corporation Tax paid or as a reward to key staff in a tax efficient manner.
I am not sure if my company qualifies?
The research and development tax credit is a great opportunity for companies with technical staff creating new ideas and developing new technologies to get cash back, irrespective of whether their project is successful or not. Companies who are carrying on traditional “white coat” activities, such as laboratory work can qualify for the R&D tax credit. However, from our experience, significant opportunities to claim the R&D tax credit often rest with companies engaging in non-traditional “white coat” activities. For example, companies developing bespoke software for use in their own trading activities, or manufacturing companies developing manufacturing processes to achieve economies of scale or scope may also be entitled to claim.
So where to next?
Choosing your R&D tax credit advisors is an important decision for you. It is essential that your advisors have the skills and experience required to deal and grow with the financial and technical needs of your business. It is equally important to know that your dedicated advisors will be able to form and maintain an excellent working relationship with your team and conduct their work in a professional and flexible manor.
Within Mazars, we have a proven track record with the key credentials to provide a first-class detailed and tailored service that will go beyond the regular requirements of an R&D tax credit review. It is this commitment which has our clients returning year on year. We have a specific dedicated Research and Development Tax Group which focuses on assisting companies in identifying activities that qualify for the Research and Development Tax Credit. In addition, we have the significant in-house scientific experience to assist and advise in both the claim and technology. Our service also extends to support our clients in the event of an audit.
- The Corporate R&D Tax Credit and U.S. Innovation and Competitiveness Gauging the Economic and Fiscal Effectiveness of the Credit- Laura Tyson and Greg Linden (2012).
- Department of Finance | An Economic Approach to Evaluate the R&D Tax Credit In Ireland: Working Paper (2014).
This article first appeared in the Engineers Journal may 2016.