Get 25% of your R&D spending back as a tax credit
There are over 80 different government supports available to small businesses but many of them are not well known or understood. Each week in the SFA e-zine, we will profile a different support that could improve your business, giving you information and advice.
R&D tax credit
A scheme whereby companies engaging in scientific or technological research and development can offset 25% of their R&D investment against their corporation tax liability.
In order to receive the tax credit, the company must be engaged in qualifying activities (the scientific test) and incur qualifying expenditure (the accounting test).
There are a number of ways the credit can be used:
- Offset against the company’s corporation tax liability in the current year
- Offset against a previous year’s corporation tax liability, which may result in a refund to the company
- Unused portion can be refunded over a three year period
The science test
The activities must seek to achieve a scientific or technological advancement that must involve the resolution of scientific/technological uncertainty.
A process, material, device, product, service or system does not become an advance in science or technology simply because science or technology is used in its creation.
The R&D can be classified as basic research, applied research or experimental development. The solution cannot be reasonably available to a competent professional in the field.
The accounting test
Qualifying expenditure may come under a variety of headings:
- Direct staff costs
- For those involved in the R&D – portion of wages, employer PRSI, any reasonable bonuses or pension contributions paid on behalf of employees
- Raw materials
- Direct overheads
- Additional costs over and above normal cost of production
- Plant and machinery
- Proportion of the up front cost that can be claimed is the proportion of the use of the plant/machinery for R&D
- Sub contracted R&D costs (subject to certain rules)
- Subcontractors could be third parties or third level institutions
- In certain circumstances only, and subject to a limit of whichever is the higher of €100,000 or 10% of the total (5% if subcontractor is a third level institution)
- Computer software and hardware costs
- Buildings (special improved rules apply)
- Fixtures and fittings
The aim of the scheme is to incentivise R&D activities in private companies. Innovation is widely recognised as a key ingredient of economic and business success across all sectors of the economy.
The level of innovation in small firms in Ireland is slightly higher than the EU average but well off the top of the rankings. Furthermore, indigenous small firms are significantly less likely to innovate than their foreign-owned counterparts.
Companies can make the claim directly to Revenue and must keep all related documentation for at least four years.
- Approve the tax credit and offset it against the corporation tax liability or repay the amount over the subsequent three years
- Query the claim and review the financial calculations (query the accounting test)
- Query the claim based on the scientific test, sending a form with 23 questions to the company
- Conduct an onsite audit
- Conduct an onsite audit and query both the scientific and accounting aspects of the claim
If you are interested in applying, don’t forget:
- The credit is available to companies only
- The claim must be made within 12 months of the end of the accounting period in which you incurred the expenditure
- It is important to keep good records to validate your claim if needed. These include staff timesheets, project notes, internal memos, emails, board meeting minutes, project budget forecasts, goals documented, lab notes, records of milestones etc.
- All activities must be carried out by the claimant company (apart from subcontracting)
- Projects should be organised, systematic and structured and must be managed by suitably qualified experts
- To listen back to a webinar on the R&D Tax Credit delivered to SFA members by Mazars tax experts and view the accompanying slide deck, click here. Guidelines and FAQs are also available on the Revenue website.
SFA Webinar - Government Supports
SFA Acting Director, Linda Barry will deliver a webinar on 26 July from 2:15pm - 2:45pm on 'The what, where and how of grants, loans, tax savings and other government supports.' Register online now for the webinar.