If your business invests in innovation, the costs of research and development may well be eligible for a tax credit. The Research and Development Tax Credit can be claimed by any type of company in any industry as long as it has carried out qualifying activities.
Research and Development in Ireland
The international indicator used to measure R&D carried out in a country is “gross domestic expenditure on R&D” (GERD), which is expressed as a percentage of GDP. GERD includes all expenditure on R&D by businesses, higher-education institutions, government, and non-profits. GERD in Ireland in 2017 (latest figures) was 1.05% of GDP, but the government’s goal is a 2.5% (approximately 2% of GDP) spend by 2020. We need more small companies innovating sooner to ensure Ireland has a growing, exporting, indigenous enterprise base.
This particular tax credit goes back to the Taxes Consolidation Acts of 1997 but, for a variety of reasons, the R&D tax credit is underclaimed in Ireland. This may be because companies aren’t aware it exists or because the process is fairly complicated and the definition of research and development, in this case, is quite broad.
The basics of the tax credit
The R&D tax credit is administered by Revenue. Irish companies can claim for qualifying research and development activities in Ireland or within the European Economic Area. Qualifying R&D expenditure generates a 25% tax credit for offset against corporation taxes in addition to a tax reduction at 12.5%. This means that companies undertaking qualifying R&D can claim a total refund from the Revenue of €37.50 for every €100 of R&D expenditure.
The tax credit can be offset against the current year’s or immediate prior year’s corporation tax liability and is in addition to the corporate tax deduction that is otherwise available for the expenditure. Claims for R&D tax credits must be made within twelve months from the end of the accounting period in which the R&D expenditure was undertaken.
If a company doesn’t have a tax liability in the current or immediate prior period, it can claim a repayment in cash of R&D tax credits in three equal instalments over a three-year cycle. The refund is limited to the greater of either the corporation tax payable by the company in the preceding 10 years or the payroll liabilities for the period in which the relevant R&D expenditure is undertaken. Otherwise, you could carry the refund forward until you do have a corporation tax liability.
Qualifying R&D expenditure generates a 25% tax credit for offset against corporation taxes in addition to a tax reduction at 12.5%. This means that companies undertaking qualifying R&D can claim a total refund from the Revenue of €37.50 for every €100 of R&D expenditure.
Getting help with an R&D Tax Claim
As mentioned, the process of claiming is quite complex. Because a scientific or technical expert is needed to verify the claim, we don’t manage these projects on behalf of our clients. Instead, we have partnered with RDP Associates, a specialist in this area. RDP Associates operates in Canada, the USA, the UK, the Netherlands, Germany, and Ireland. With three decades of experience under their belt, they have the expertise, experience, and methodology to really deliver for their clients – with approximately €350 million worth of claims made to date.
Where we identify that a client might have a claim, we refer them to RDP Associated for a free initial consultation to assess their project and decide whether to go ahead with a claim. Companies in this field generally work on a ‘no win no fee’ type basis – at RDP Associates the fee is 20% of the claim value. RDP has a team of software specialists, scientists, and engineers as well as their expert consultants who put together the claim, submit it, and then deal with any queries from Revenue.
As part of their process, RDP Associates will talk to key people in the business to establish a baseline of technology, scientific or technological advancement, scientific or technological uncertainties, and the systemic work that the company has done in terms of R&D activities. This allows them to assess their activities against qualifying conditions to decide whether a claim may be possible.
They will advise on record-keeping and what types of costs are qualifying. Part of the service is preparing detailed reports when a claim is made – while not essential to making the claim, it will prove invaluable if Revenue comes back to the company looking for documentation. It’s worth remembering that Revenue can audit any R&D tax claim for up to four years from the end of the claim’s accounting period.
Putting together an R&D tax claim
Each claim has to be judged on its own merit, so there is no easy menu of actions/activities we can list here. There has to be a scientific or technological aspect to the research and development in question. This means there must be challenges and uncertainties which experts in the field don’t yet have answers for and for which the answers are not readily available. According to Revenue, activities must:
- involve systemic, investigative or experimental activities
- be in the field of science or technology
- involve one or more of these categories of R&D: basic research, applied research, and/or experimental development
- seek to make scientific or technological advancement
- involve the resolution of scientific or technological uncertainty
Claims need to be properly prepared and the claim needs to be substantiated as well as meeting qualifying conditions. There are criteria for contemporaneous records of staff time spent, processes followed, etc., so this is really something you need to think about before you even start your R&D activity. Trying to do this record-keeping after the fact is a lot harder, so companies usually keep weekly, or possibly monthly, records of inputs into the R&D project.
Also keeping track of the project’s significant milestones gives context to your input records – for example, dates when key prototypes are built, beta testing, breakthroughs, as well as roadblocks. It’s a good idea to assign this job to a particular member of the team, as the quality of record-keeping can be what makes or breaks a claim.
The biggest costs in a claim tend to be salaries or contractor fees. This could be, for instance, a software engineer developing a new technology or process. Material costs, overheads, and capital expenditure (plant and machinery, or land and buildings, for instance) can also be part of a claim.
Improve your chances of a successful claim
As you can see, putting together a claim doesn’t just require technical expertise. It also involves a lot of work and creates quite a paper trail. However, if your claim is accepted, this amounts to a huge saving on potentially ground-breaking advances for your business. Rather than feel daunted, talk to an experienced company that specialises in these claims and will increase your chances of a successful claim.