Budget 2015 Submission - The Research and Development Tax Credit

SciMet R&D have made our pre-budget submission. It includes recommendations that, in our view, will help address some of the points raised during last years review regarding the administration of the R&D Tax Credit. We also make two recommendations that would benefit SMEs and Start-Ups in availing of the payable tax credit. Full details of our submission are set out below. If you have any queries or comments please let us know.

 

Budget 2015 Submission - The Research and Development Tax Credit

Introduction

In 2013, the Department of Finance conducted its most comprehensive review of the R&D Tax Credit since it was introduced in 2004. As well as engaging directly with R&D performing companies, an independent survey was commissioned and interested parties were invited to make submissions. As part of its submission, IBEC undertook its own survey of Irish companies and presented its findings. The Department of Finance subsequently published two detailed and insightful documents, the Review of Ireland’s Tax Credit in October 2013 and An Economic Approach to Evaluate the R&D Tax Credit in Ireland, earlier this year.  


The scale of the review and the wide variety of sources of input into the process have provided unprecedented volumes of quantitative data and qualitative feedback in relation to the R&D Tax Credit. All stakeholders presented their views and recommendations based on their own unique perspective. However, there was also some consistency among those that participated in surveys and submissions in highlighting areas that, in their view, require attention. Many highlighted the administration of the R&D Tax Credit as one such area. We believe that this year’s Budget represents an opportunity to address the points raised so as to deliver an R&D Tax Credit that remains “best in class”.


Approximately one third of the large companies that participated in IBEC’s survey regarded the “certainty that once claimed the tax credit can be retained under Revenue Audit” as poor or very poor. A similar proportion raised concerns about the lack of clarity surrounding what constitutes qualifying activities for the purposes of the tax credit. Many of the submissions also highlighted the need for greater certainty, clarity and consistency as high priority issues. As the review was policy focused, these issues were not addressed in the final report issued by the Department of Finance.  However, it was confirmed in the report that the feedback would be forwarded to the Revenue Commissioners.


Since then, we are pleased to hear that work has been initiated to update the Revenue Guidelines for Research and Development Tax Credit and that these are due to issue in the near future. We hope that the updated Guidelines will assist in providing the certainty and clarity that R&D performing companies are seeking. We have a number of other recommendations that we believe will further assist these companies and have set these out in Recommendations 1 to 4 below.


We also include a further two recommendations (Recommendations 5 and 6) that in our view, would have a positive impact on many SME and Start-Up companies without incurring significant additional exchequer costs. 

 

Recommendation 1 – Expanded Revenue Guidelines that are updated regularly

It is our understanding that the eagerly anticipated update to the Revenue Guidelines for Research and Development Tax Credit should have issued well in advance of Budget Day. Therefore we hope that our call for expanded guidelines is redundant by that time.


This will be the case where the expanded guidelines provide clear, comprehensive and unambiguous guidance on both the science test and the accounting test and address any contentious areas and/or sector specific issues that are known to be presenting challenges to R&D performing companies at present.  We would also like to see a commitment to keep the Guidelines updated regularly going forward.

 

Recommendation 2 – Introduction of R&D Tax Credit Stakeholder Group

The review carried out by the Department of Finance in 2013 has provided unprecedented information, analysis and insight into the R&D Tax Credit. Those involved from the Department should be acknowledged for their work and the positive, collaborative and transparent manner in which the review was conducted. Their success in engaging the wide variety of stakeholder groups with an interest in the R&D Tax Credit was crucial to the process. From the companies that participated in surveys to the individuals who responded to the Department’s invitation for submissions, each made their own valuable contribution.


We believe that now is an opportune time to build on this good work and to set up an R&D Tax Credit Stakeholder Group. The group could meet regularly to provide/receive real time feedback on the tax credit, address risk areas and identify ways in which the operation or administration of the scheme would be further improved. In our view, key to the success of such an initiative is that, similar to last year’s review, all stakeholders are afforded the opportunity to participate and contribute.

 

Recommendation 3 – Requirement to pre-register and submit summary claim documentation in return for 12 month time limit to initiate audit of claim

The Department of Finance have recommended that the exchequer cost of the R&D Tax Credit be kept under constant review going forward. The Government’s ability to accurately estimate the final cost of the tax credit in a given year is complicated by the fact that the majority of claims are made at least 9 months after year end.  The fact that audits and/or enquiries will be initiated into a certain number of claims, many selected at random, can further delay the process.


We believe that the introduction of a system whereby companies are required to pre-register with the Revenue Commissioners as an R&D company and submit summary documentation with their claim could help address this issue. There would be improved visibility on the expected number of claims and audits/enquires would be more targeted.


For companies that pre-register and comply with the filing requirements, the time limit for an audit should be reduced from 4 years to 12 months.


Recommendation 4 – Option to use simplified R&D Tax Credit Computation

The R&D tax credit is calculated based on eligible expenditure on R&D. Given that qualifying R&D is concerned with the pursuit of new scientific and technological knowledge, staff time and costs are obviously key drivers of the majority of claims.  Assuming the definition of R&D activities is understood and systems are place for the accurate tracking of effort employed in carrying out the R&D activities, the staff costs included should be a precise, objective amount.


For other expenditure items e.g. plant and machinery and overhead costs, apportionments and estimates are often necessary at the time of preparing the claim. This can in some cases introduce a more subjective element into the tax credit. The consequence for claimant companies can be an increase in the time required to prepare and support their R&D Tax Credit and a higher potential risk of adjustments.  


We believe that the introduction of an “opt-in” scheme where a simplified computation could be used should be considered. Under such a scheme, a company would need to capture and be in a position to support its R&D staffing costs as is the case under the current scheme. This would then act as a proxy for all other eligible expenditure to be included in the claim which would be calculated by applying a fixed percentage to the staff costs amount.


Recommendation 5 – SME companies to receive payable R&D Tax Credit in one instalment

The introduction of a payable tax credit is probably the most significant enhancement that has been made to the R&D Tax Credit. The significant increase in claimant companies between 2008 and 2009 (the first year for which a payable tax credit was available) was driven primarily by the availability of cash refunds to companies with insufficient corporation tax liabilities to utilise the tax credit. In their Review of Ireland’s Tax Credit, the Department of Finance recognise the positive impact of the payable tax credit and in particular, its importance “in assisting the cash flow of smaller, typically indigenous companies”.


Under current rules, where a company’s R&D Tax Credit exceeds its corporation tax liabilities it can make a claim to receive the excess tax credit by way of cash refund. The payable tax credit is received in three instalments over a minimum 33 month period. In our view, the timeline for receiving cash refunds for investment in R&D that has already occurred is excessive. This is particularly true for many SME companies that have been most impacted by the liquidity crisis of recent years. We would therefore recommend introducing changes to the legislation so that SME companies receive their full payable R&D Tax Credit in one instalment within 3 months of filing their R&D Tax Credit.


Recommendation 6 - Removal of restriction on payable tax credit for Start Ups

Under current rules, the payable tax credit that can be received by a company as a cash refund is restricted to the greater of a) total corporation tax liabilities for the previous 10 years or b) the company’s total payroll liabilities for the previous 2 years. For accounting periods commencing before 22 June 2011, restriction b) was calculated with reference to a single year’s payroll liabilities and therefore the increase to 2 years was a welcome enhancement.


However in our view, it remains the case that the companies most impacted by this restriction are those that are often most in need of funding i.e. start-up companies. Therefore we recommend that the restriction on payable tax credits be removed completely for a company’s first three years of trading.

About Us

SciMet R&D is the leading, Irish owned, independent R&D Tax Credit consultancy. The company was founded on a simple principle – to consistently deliver exceptional service and value to R&D performing companies in claiming their full and proper R&D Tax Credit entitlement.

We achieve this by delivering the perfect blend of science, technology, tax and accounting expertise. The R&D Tax Credit is unique in that it combines a science test with an accounting test. SciMet R&D is unique in the Irish market in the value we bring to our clients in meeting both tests.

At SciMet R&D we are truly passionate about science and technology. It motivates us to be able to play a part in the exciting research and development being carried out by our clients.  Our tailor-made R&D Tax Credit services deliver efficiencies, robustness and cost effectiveness that facilitate our clients in doing what they do best – innovate.

Our Address: Unit 3, Cova, Trafalgar Road, Greystones, Co. Wicklow