Being the driving force of a smart economy, research and development is heavily encouraged in Irish business – so much so that there are tax incentives for conducting such activities.
Subject to certain conditions being met, Research & Development tax relief can return up to 25 per cent of a company’s qualifying expenditure either as a corporation tax credit or as a cash refund. This credit is in addition to the usual corporation tax deduction at the standard rate (12.5 per cent).
Many companies engaging in research and development are unaware that their expenses in this area could qualify for R&D tax relief. However, now is the time to take note, as changes to this scheme due to come into effect with the Finance Bill 2012 will be of particular benefit to SMEs with R&D portfolios.
Where relief was once calculated on an incremental basis using 2003 as a base year, the new bill will introduce a volume-based system for the first €100,000 of qualifying expenditure. This change is particularly appealing for SMEs as the base-year R&D spend will not be taken into account. Also of benefit to small businesses with limited in-house capabilities is the allowance for out-sourced R&D activities to universities or organisations.
R&D relief applies to expenses related to the research and development of new – or the improvement of existing – products and processes, which includes wages, related overheads, plant and machinery and buildings. For your R&D efforts to be considered eligible, they must be systematic, investigative or experimental; seeking to achieve scientific or technological advancement; and using basic or applied research, or experimental development. You must also be conducting research in an approved field of science or technology, which includes areas as varied as software development, pharmaceuticals, financial services and horticulture.
This tax credit can also apply to expenditure on premises used for research and development. As long as at least 35 per cent of all activities carried out on the site within a specified four-year period are R&D-based, credit can be claimed for the proportion of use of the building for these activities.
The Revenue Guidelines for Research and Development Tax Credit is a 33-page document available for download fromwww.revenue.ie. What it boils down to is that claims must be made within 12 months of the end of the accounting period in which the expenditure was incurred, and they are submitted within your corporation tax return.
Ensure that your claim has been compiled in accordance with all of the legislation before filing. Some businesspeople erringly believe that once the CT1 is in the post, the claim is complete. However, you must remain aware that a claim is generally not accepted by Revenue until they have audited it. In this case, Revenue has the right to audit the claim within four years of receiving it and, given that the R&D tax credit scheme is a cash-paying system, they are quite diligent when it comes to following up on these claims.
These audits can be rigorous and the penalties can be harmful, so be prepared. Uniquely, these claims are reviewed by a Revenue inspector and a technical expert with specialised knowledge in a relevant field to the R&D work undertaken. For your end, you must be sure that the activities undertaken comply with the statutory definition of R&D, and that you have records of expenditure incurred in carrying out these activities.
As with all things tax-related, it’s best to talk to a professional before proceeding with a claim. Give us a call on (01) 823 0000 and we’ll see what we can do to help.
DCA Accountants and Business Advisors