Knowledge Development Box

The Knowledge Development Box (“KDB”) opened for business with effect from 1st January 2016. For accounting periods commencing on or after that date, companies can avail of an effective corporation tax rate of just 6.25% on qualifying profits. This is the first OECD compliant scheme to be introduced anywhere in the world. Below we highlight the main features of the KDB as well as some of the more frequently asked questions received to date.

 

To benefit from the KDB, a company must be entitled to income from a qualifying asset. A qualified asset is certain intellectual property (“IP”) that has resulted wholly or partially from R&D (as defined for R&D Tax Credit purposes) undertaken by the company. The claimant company does not have to legally own the IP. It is the entitlement to income from IP that the company has created, either alone or in in collaboration with others, that is key. Therefore, IP being held within another group company will not proscribe a claim from being made as long as all other criteria are satisfied.

 

The following IP can qualify for the KDB:

 

      • Computer Programs within the meaning of the Copyright and Related Rights Act 2000 (i.e. “…..a program which is original in that it is the author’s own intellectual creation and includes any design materials used for the preparation of the program.”);
      • A qualifying patent. This is primarily patents granted following substantive examination for novelty and inventive step. Other patents may qualify but only where they are granted before specified dates and meet other requirements e.g. the Patents Office has caused a search to be undertaken in relation to the invention and prepared a search report;  
      • Certain Supplementary Protection Certificates; and
      • Plant Breeders’ rights within the meaning of section 4 of the Plant Varieties (Proprietary Rights) Act 1980.

 

For small companies, inventions certified by the Controller of Patents, Designs and Trade Marks as being novel, non-obvious and useful also come within the KDB. However, primary legislation still needs to be enacted to give effect to this category of qualifying asset.

 

The KDB legislation also specifies the income that qualifies for the reduced effective corporation tax rate. Royalties, Licence Fees, Insurance, Damages and Compensation can all be included to the extent that they relate to qualifying assets. Also included is the portion of sales proceeds from products and services but only to the extent they can be attributed to the qualifying assets. KDB profits are calculated by deducting all expenses laid out or expended in earning the income.

 

If a company acquires IP, outsources R&D to group companies or undertakes R&D outside the EEA, the Modified Nexus Formula will reduce the profits that benefit under the KDB. The formula applies as follows:

                               

                                QA                          x              QE + UE

                                                                                      OE

                                Where –

QA is the profit of the specified trade relevant to the qualified asset.

QE is the qualifying expenditure incurred by the company on the qualifying asset. This includes its own R&D expenditure as well as payments to unconnected parties for R&D.

OE is the overall expenditure on R&D. In addition to the qualifying expenditure referred to above, OE includes all IP acquisition costs, group outsourcing costs and expenditure incurred in the carrying on of R&D outside of the EEA by the company itself.

UE or “uplift expenditure” is an additional amount allowed above the line where a company incurs IP acquisition or group outsourcing costs in relation to the qualifying asset. UE is restricted to the lower of a) 30% of qualifying expenditure or b) the aggregate of acquisition costs and group outsourcing costs.

 

The KDB operates by treating an allowance, equal to 50% of the qualifying profits, as an expense of the trade thereby resulting in a 6.25% effective corporation tax rate.

 

Detailed provisions relating to the documentation to be maintained for each claim is set out in the KDB legislation.

 

 

The Knowledge Development Box - FAQs

 

Question 1. What is the deadline for making a claim?

Claims must be made within 24 months from the end of the accounting period to which the claim relates.

 

Question 2. We have applied for a patent but it has not been granted yet. Do we have to wait for the patent to be granted before claiming?

No. You have a choice whether to claim in the accounting period in which the application is a) submitted or b) granted. If option a) is chosen and the application is subsequently refused, the additional tax must be repaid along with any interest due.

If you decide to wait for the patent to be granted before claiming, you must submit a protective claim for each intervening period (i.e. between application and grant) setting out the allowance that will be claimed once the application is granted. It is important that the allowances are accurately calculated when making the protective claim as the subsequent claim cannot exceed this amount.

 

Question 3. Our product incorporates a number of different patents. Do we have to identify income/profits relating to each patent separately?

It may be possible to group the qualified assets as a “family of assets”. This applies where it is not possible to identify overall income or qualifying expenditure for each qualifying asset separately due to their interlinked nature. 

 

Question 4. Commercialisation of IP is some way off and profitability even further down the line. Should we wait until then to look at the KDB?

The KDB legislation prescribes the supporting documentation to be maintained in relation to every claim. This includes back up to the qualifying expenditure incurred by the company in carrying out the R&D that resulted in the qualifying asset. This documentation should be captured contemporaneously.  

If a company is unable to robustly support its qualifying expenditure, the benefit of the KDB may reduce under transitional measures that will see a phasing out pre-2016 qualifying expenditure in applying the modified nexus formula. However this can be avoided if the required supporting documentation is available.

Therefore we would recommend that companies take action now to secure their full KDB entitlement.

 

Question 5. Does the reduced corporation tax liability on KDB profits mean that our payable R&D Tax Credit will increase?

Unfortunately not. Your payable R&D Tax Credit is calculated without reference to the KDB allowance.

 

 

If you have any queries on the KDB please contact us. 

Quick Guide

KDB Infograph

Knowledge Development Box Quick Guide

 

Access the guide...

 

Revenue Guidelines

Revenue Knowledge Development Box Guidelines 

Following extensive consultation with stakeholders, practical guidance on the Knowledge Development Box (KDB) has been issued by Revenue.  
Click here for Revenue’s KDB Guidelines...
 

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.

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