Research & Development Tax Credit
The Research & Development Tax Credit was initially introduced in 2004 to incentivise R&D activity in Ireland. Today, it is available to all companies within the charge to Irish tax who undertake R&D activities anywhere in the EEA, provided that expenditure of such R&D activities is not otherwise eligible for tax benefits elsewhere in the EEA.
A company that incurs expenditure on R&D may avail of a tax credit of 25% on all R&D activities expenditure incurred on or after 1 January 2015. For accounting periods commencing prior to 1 January 2015 the credit is available (at a rate of 25%) on incremental expenditure over and above the expenditure (if any) incurred in a base year (2003).
The categories of activities that qualify for relief are natural sciences, engineering and technology, medical sciences and agricultural sciences and the tax credit is available in respect of expenditure incurred in the carrying out of research and development activities including expenditure in respect of indirect supporting activities such as maintenance, security, administration, subcontracted R&D activities and ancillary activities such as taking on staff and leasing laboratories.
If a company is involved in any of the following activities it could be eligible for the R&D credit on its expenditure:
- Development of a new product/improvement of an existing product
- Development of a new process/improvement of an existing process
- Improvements to plant performance i.e. improvements of energy efficiency
- Improvements to production output waste reduction, yield improvement or substitution of raw materials etc.
- Development of product specifications with customers or suppliers
- Process change to improve environmental or safety performance
- Plant/product trials either on the production line or on pilot facilities
- Automation of manual processes involving the development of new processes and systems
- Development of new techniques for production, analysis, testing etc.
- Modelling or simulation activities
- Development of solutions to reduce a high number of product returns due to failure or technical deficiencies
- Use of new or modified raw materials
Payments to third parties such as universities or other organisations specialising in research and development can also qualify for the credit subject to monetary limits. The Finance Act 2014 increased these limits on qualifying “outsourcing” expenditure to the greater of either €100,000 or 15% of the company’s in-house spend on R&D activities (5% in the case of payments to third level institutions). This increased limit is likely to be of use to smaller companies who do not necessarily have the manpower or skills in-house to carry out significant levels of R&D and who instead adopt an “outsourcing” model. The total amount of qualifying “outsourcing” expenditure may not, however, exceed the company’s in-house spend for a given year. In addition, where a company intends claiming a credit for “outsourcing” expenditure, it must notify the third party provider in writing that it may not also claim an R&D tax credit in relation to the expenditure. This will clearly have an impact on the third party and may potentially have a bearing on the commercial arrangements between the parties.
It should be noted that companies claiming the R&D credit are not required to hold the intellectual property rights resulting from the R&D work.
If a company has insufficient Corporation Tax against which to claim the tax credit in a given year it has significant flexibility in respect of what it can do with the excess. For example, it may offset that unused portion of the credit against the Corporation Tax of the preceding accounting period (in which case it may apply for a refund of tax paid from Revenue) with any remaining excess being carried forward indefinitely against future Corporation Tax liabilities. Alternatively, where there was no (or very little) Corporation Tax liability for the preceding year, the Company may apply to Revenue for a repayment of the excess unused R&D tax credit. Such repayment shall be made in instalments by Revenue.
Where a group of companies incur expenditure on R&D in a relevant period, they may decide between themselves to allocate that expenditure to certain individual group members subject to certain conditions. If the group has insufficient Corporation Tax liability to claim the tax credit in a given year the credit may be carried forward indefinitely.
A 25% credit can also be claimed for expenditure on buildings used wholly or partly (greater than 35%) for research and development. Where the building forms part of a larger development, or is one of a number of buildings it is necessary to apportion the expenditure to determine what element of the expenditure is attributable to R&D as the credit is available only in respect of the portion of the building used for R&D activities.
An important point to note is that the R&D tax credit is in addition to any allowable deductions for R&D expenditure in the accounts of the company. So for example, where a company spends, say, €100,000 on salaries for employees engaged in research and development, that €100,000 can be included both as R&D expenditure for the purposes of calculating the R&D tax credit available, and as a deduction in the accounts of the company when calculating taxable profit in the normal course.
Records must be maintained by a company in order to support its claims for the R&D tax relief. However, given the high costs of research and development activities and the requirement for on-going monitoring inherent in such projects the records required for the Revenue Commissioner’s purposes should generally be available within a company for its own internal purposes.
Revenue Commissioners have confirmed that they will be prepared to give an advance opinion as to whether a proposed project would satisfy the requirements of the legislation. With effect from 1 January 2009 all claims must be made within 12 months of the end of the period in which the relevant expenditure was incurred.
Employees Engaged in R&D
Finance Act 2012 introduced a ‘reward’ mechanism which provides that where a company benefits from a R&D tax credit, part of that tax credit can be used by the company to reward “key” employees who have been involved in the R&D process by enabling those employees to receive part of their remuneration tax-free. “Key Employees” is strictly defined and excludes directors and employees with a material shareholding in the company. Where a company does have employees whom it wants to reward, the company has a discretion as to who receives the reward and how much of the tax credit can be used.
Capital Allowances & Intangible Assets
Finance Act 2009 introduced capital allowances on capital expenditure incurred by companies on the acquisition or development of certain specified intangible assets such as patents, inventions, trademarks, copyright related knowhow, goodwill and licences. This has helped promote Ireland internationally as a competitive location in respect of the centralisation, management and development of intellectual property.
Companies carrying on a trade will be entitled to claim a tax write-off for the capital cost of acquiring or developing the intangible asset. The tax write off is granted as a capital allowance and the write off is available in line with depreciation or amortisation for accounting purposes. Alternatively a company can elect to take a tax write-off against its taxable income over a 15 year period. The carry forward of allowances is permitted under the legislation.
A clawback of capital allowances claimed arises where the intellectual property is sold within five years of its acquisition (or 10 years in the case of expenditure incurred prior to 13 February 2013).
The legislation does, however, contain certain restrictions and anti-avoidance measures. For example, the allowance will not apply where the expenditure incurred on the asset exceeds the arm’s length amount or where the expenditure was incurred as a means of reducing or avoiding a liability to tax.
The Stamp Duties Consolidation Act 1999 provides for an exemption from stamp duty on the sale or transfer of intellectual property. ‘Intellectual Property’ is quite widely defined in that act and includes any patent, trademark, copyright, registered design, invention or domain name. Any goodwill attaching to such intellectual property is also exempt from stamp duty under the Act. Accordingly, where a business is sold or acquired which includes intellectual property, the part of the consideration attributable to the IP (and any goodwill attached to the IP) is disregarded when calculating the stamp duty payable on the transfer.
In addition to the significant tax savings available to companies under the R&D tax credit, the tax relief for expenditure on intangible assests and of course the 12.5% rate of Corporation Tax, companies (and their employees) can also benefit from various attractive tax structuring options available in the Irish jurisdiction.
For example, the Irish Government introduced a new ‘Special Assignee Relief Programme’ in Finance Act 2014. This programme is aimed at encouraging key talent within organisations to relocate to Ireland in exchange for tax relief on their income.
As profits from the various international operations, either subsidiaries or branches, are taxed at different national rates, the task facing a company is how to remit these funds to the company’s foreign headquarters as tax-efficiently as possible. In order to increase its attractiveness to multinational corporations and help satisfy their requirements in this regard, Ireland has developed a specific holding company regime that is designed to encourage business to locate in Ireland by offering a competitive tax environment that places low taxes on the movement of profits from operating entities located in various jurisdictions to the Irish holding company and in turn back to the ultimate parent company.
In addition, Ireland operates a single tier tax system such that companies are taxed at a national level only, with no local or state taxes being applied. Corporate tax returns are calculated on a self-assessment basis. The company itself determines its liability to corporate tax, whereupon, if required it makes a tax return and makes the appropriate payment.
Furthermore Ireland has an extensive list of double taxation treaties with countries that produce over 90% of the world’s GDP. Currently, Ireland has double taxation treaties with over 70 countries and the treaty network continues to be expanded and updated. Companies that are resident in Ireland may avail of such treaties. These treaties secure a reduction, or in many cases, a total elimination of withholding taxes on royalties and interest.
The incorporation of an Irish holding company is relatively straightforward and a company would not necessarily have to re-locate its centre of operations to Ireland in order to become Irish resident. There are, however, some requirements which would need to be satisfied to ensure that such a company’s residency in Ireland could not be challenged. In addition, Ireland’s membership of the euro, ease of access, an uncomplicated regulatory system and being an English speaking country enables the adoption of Irish corporate residency to be relatively trouble free, particularly for UK and US firms.
The above is a very general and simplified summary of the law on the subject matter. As such you should obtain professional advice before taking any actions as regards you or your company’s affairs. Should you wish to make enquiries in relation to any of the areas touched on by this article please contact Adrian Burke & Associates.