Did you know that money spent by a company on research and development activities may qualify for a tax credit? The Irish R&D Tax Credit is calculated at 25% of qualifying expenditure and is used to reduce a company’s Corporation Tax (CT). If the company is not yet profitable, these credits can be claimed as cash rebates from Revenue.
You may have heard about the Research and Development Tax Credit scheme, but not been sure if your activities qualify and or how to get started. This scheme can potentially result in substantial cash benefits, but it is a closely monitored process that will require a systematic, detailed approach. Because this is a specialist area, I sat down with Brian Cookson and Paul Phelan of RDP Associates to learn more.
Take-up of the R&D tax credit scheme
According to the most recent data released by Revenue, the total value of R&D tax credits claimed is around €1.3 billion a year. 22% of this value goes to SMEs, the rest to large enterprises. It’s a fairly small scheme compared to international equivalents, with around 1,600 claims in total each year (compare this to the UK version of this scheme, with at least 90,000 claims annually). Half the claims are for just €10,000 to €100,000. In large enterprises, the average claim is around €2 million annually. For SMEs, the average is around €115,000, but this figure is likely skewed upwards by the fact that some larger SMEs are making substantial annual claims.
You may feel apprehensive about the amount of work and scrutiny that making a claim could involve. The first thing Brian Cookson points out is that a Revenue review of your claim won’t lead to an inspection of all the company’s books, with all the extra work and disruption that this could cause. When Revenue evaluates these claims, it focuses solely on the project-related paperwork to see if the company has met the criteria.
RDP’s approach to claiming R&D tax credits
If a company is thinking of claiming R&D Tax Credits, RDP kicks off with a free 30-minute call to assess their activities. At the end of this discussion, RDP will normally have enough information to give an estimate of the amount of credit that could be claimable, as well as how much work will be involved in preparing the claim. If you decide to go forward, RDP will engage with you to prepare and submit the claim.
Revenue has a set of guidelines for submitting claims, which contains around 25 key questions they need answers to. RDP collects this information by interviewing the technical leads at the company and then compiling their findings in the form of a report. At the same time, they identify the eligible R&D costs across the business for each project. The result is comprehensive documentation for Revenue demonstrating how the various projects meet the scheme’s criteria, what the activities were, and the costs involved.
If Revenue wants to query or audit the claim after it has been submitted, RDP is also available during the process. This includes briefing the company before review meetings, attending meetings with Revenue, and checking any information that is passed to Revenue in support of the claim. Their goal in all of this is getting clients to a well-organised situation, both in estimating the eligibility and then in helping prepare the claim and deal with any follow-up from Revenue.
Not all SMEs work with a consultant like RDP, of course. Either they don’t want to or are cash-strapped and opt to work on things themselves. If you are experienced preparing this kind of claim, you can absolutely take it on yourself. But companies can have a bad experience if Revenue raises a query and they haven’t correctly laid the groundwork for their claim. This could see them trying to ‘backfill’ the documentation required.
At Beyond, we see the benefits of working with a consultant such as RDP, particularly as their fee is a percentage of the overall claim authorised so is in effect a ‘no win, no fee’ scenario which will appeal to many SMEs.
Irish Revenue’s review of tax credit claims
One thing to note about the R&D Tax Credit scheme is that Revenue reviews the vast majority of claims. While you may not get queried every single year, the chances of being review once in a 3-to-5-year period are very high. Remember, there are different levels to a Revenue audit (I give a full explanation of how this can work in our blog, What To Do If Irish Revenue Selects Your Business For Audit), so we could be talking about a simple query over one element of your claim, or a full and detailed audit of the entire project.
Revenue demands very systematic documentation for R&D Tax Credits. Where this isn’t already in place, it can be very difficult to put together post hoc. The team may have forgotten salient details, or personnel could have moved on, making it hard to explain exactly what happened. Queries can happen years after the claim, causing degrees of stress and disruption for all involved. RDP’s Innovation Connection Program is an effective and efficient way to identify and track R&D in real time.
Brian estimates that where a claim is reviewed by Revenue, it could end up being reduced by around 20%, although there are no official figures for this. When a full-blown audit happens, Revenue may also be looking at the scientific basis of the R&D. Qualifying research and development under this scheme is systematic, investigative, or experimental activity in a field of science or technology – basic research, applied research, and experimental development. In other words, it’s about HOW and WHY you are developing your solution, not WHAT you are developing.
As Brian and Paul explain, 90% of claims that are denied probably didn’t meet the ‘science test’ criteria of the scheme. They use an example of a company developing a software platform where the specific solution being proposed doesn’t yet exist in the market. The product may be innovative, but the way the company build it uses already existing tools and programming languages/libraries. In other words, there was no innovation in the underlying technology of the solution. The advance and innovation are real, but they are commercial and not technological.
For the purposes of this scheme, “An advance in science or technology means an advance in the overall knowledge or capability in the field of science or technology (not an advance in the company’s own state of knowledge or capability alone).” So, the risk is that the whole claim is rejected years after the credit has been banked and spent. However, RDP prefers to focus on technological uncertainties that existed at the start – or that arose during – the R&D activities. In this way, RDP can identify and demonstrate the required advancement being sought.
As you can see, this tax credit scheme is constrained in its definitions, but it is very valuable for companies of any size carrying out genuinely innovative activities. Ultimately, it’s about understanding how best to demonstrate that your work fits the criteria and having excellent documentation for your projects. If you think your research and development activities may be eligible, I recommend a conversation with a consultant who specialises in tax credit claims.
