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Finance Bill 2019 – R&D Tax Credit

 

Finance Bill 2019, published on the 17th October 2019, provides further details of the R&D Tax Credit changes announced last week in Budget 2020 and proposes some new measures, previously unannounced. It is important that all companies claiming the R&D Tax Credit familiarise themselves with these proposed changes.

The Finance Bill must be passed by the Dail and the Seanad prior to being enacted and is therefore subject to change. We will keep you updated on any changes as the Bill moves through the various stages.

Below we describe the main Finance Bill 2019 measures pertaining to the R&D Tax Credit:

 

1. 30% R&D Tax Credit for Small and Micro Companies

As announced on Budget day, the rate of R&D Tax Credit that will apply to Small and Micro companies is to increase from 25% to 30%. The Minister for Finance has yet to confirm the date that this increase will apply from.  

An important point to note is that this increase applies to Small and Micro companies within the meaning of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 in which:

 

  • A small company is defined as a company with fewer than 50 employees and with either an annual turnover and/or an annual balance sheet total not exceeding €10 million.
  • A micro company is defined as a company with fewer than 10 employees and with either an annual turnover and/or an annual balance sheet total not exceeding €2 million.

 

It was mistakenly reported in some media outlets after the Budget announcement that companies with up to 250 employees can avail of the increase in the rate. This is not the case at present.

 

2. Payable Credit Limit for Small and Micro Companies

The maximum amount of an R&D Tax Credit that a company can currently receive as a payable credit is restricted based on the greater of a) its corporation tax liabilities over a 10 year period or b) its aggregate payroll liabilities for the claim year and the prior year.

Small and Micro companies will now also have the option to calculate their payable credit restriction based on the aggregate amount of twice their payroll liabilities for the relevant period for which the R&D Tax Credit is being claimed.

 

3Small and Micro Companies: Pre-trading expenditure

A new section, S766C, will be introduced giving small and micro companies the ability to offset the R&D Tax Credit arising on pre-trading expenditure against its payroll and VAT liabilities for the period. Where this results in an overpayment of payroll taxes and/or VAT, a refund may issue.

If emoluments remain outstanding for longer than 3 months after the end of the relevant accounting period, the payroll liabilities relating to those emoluments cannot be offset by the R&D Tax Credit.  

Previously, pre-trading expenditure could only be used to offset a company’s corporation tax liabilities. This remains the case for companies not considered Small or Micro.

For Small and Micro companies, the amount of the tax credit available for carry forward for offset against corporation tax will need to be adjusted to reflect amounts claimed against payroll and VAT liabilities.

 

4Subcontracting to Universities

For accounting periods beginning on or after the date of the passing of the Finance Act, it will be possible to include payments to universities or institutes of higher education in order for them to carry on R&D activities in a relevant Member State up to the greater of a) 15% of the company’s own in-house expenditure on R&D or  b) €100,000 (to the extent that it does not exceed the company’s own in-house expenditure on R&D.

Previously, the restriction calculated at a) was 5% of the company’s own in-house expenditure on R&D.

 

 5. Subcontracting to Unconnected Third Parties

If a company intends including payments to unconnected third parties for R&D in their R&D Tax Credit claim, they will need to issue the required written notification to that party “in advance of making the payment or on the date the payment is made” . This written notification needs to state that the payment is a payment to which the relevant clause of S766 TCA 1997 applies, and that the person may not make an R&D Tax Credit claim in respect of such R&D activities. This change will come into effect for accounting periods beginning on or after the date of the passing of the Finance Act.

This proposed change needs to be considered along with recent updates to the R&D Tax Credit Guidelines in which Revenue confirmed that:

“Where the outsourced activity is undertaken by a person who could not claim the R&D tax

credit (for example an individual, or by a non-resident 3rd party which does not have a

branch in the State) then Revenue will accept that a notification is not required in these

cases.”

This may help alleviate some of the administrative burden that will undoubtedly arise in complying with this change.

 

6. European Union Grants

The wording of S766(1)(b)(v) TCA 1997 is to be updated to confirm that expenditure will also not be regarded as having been incurred by a company for R&D Tax Credit purposes if it is met by grants or other assistance granted by or through the European Union or an institution, office, agency or other body of the European Union.  

Currently, the legislation only covers grants or assistance from the State or another relevant Member State, or any board established by statute, any public or local authority or any other agency of the State or another relevant Member State.

This change follows on from the clarification that Revenue issued earlier in the year that “European Commission grants may not fall within the definition of section 766(1)(b)(v) TCA 1997, this will be dependent on the terms and conditions as set out in each grant agreement.

This change will apply as respects accounting periods beginning on or after the date of the passing of the Finance Act.

S766(1)(b)(v) will also be extended to cover grants or assistance from countries other than Ireland and relevant Member States as well as any board, authority, institution, office, agency or other body in those other countries.

These changes will also apply to S766A, R&D Buildings and Structures.

 

 7Penalties and Clawback of tax credit

S766(7B)(b) TCA 1997, the section dealing with the application of penalties will be updated to provide that payable credits may come within the penalties provisions whether they have been paid out or not.

S766(7B) TCA 1997 will also provide that where a charge to tax arises due to the clawback of a payable tax credit or an amount surrendered to a key employee, losses and/or credits cannot be used to shelter the tax arising from the clawback.

Budget 2020 – R&D Tax Credit Changes

 

Minister for Finance Paschal Donohoe today announced a number of significant changes to the R&D Tax Credit in his Budget 2020 speech:  

 

1. An increase in the R&D Tax Credit rate from 25% to 30% for small and micro companies.

A small company is defined as a company with fewer than 50 employees and with either an annual turnover and/or an annual balance sheet total not exceeding €10 million.

A micro company is defined as a company with fewer than 10 employees and with either an annual turnover and/or an annual balance sheet total not exceeding €2 million.

 

2. The limit on the amount of the R&D Tax Credit available as payable credit to small and micro companies is to be enhanced.

 

3. The R&D Tax Credit due in respect of a company’s pre-trading expenditure will be available as on offset against the company’s VAT and Payroll tax liabilities. At present, the R&D Tax Credit due in respect of a company’s pre-trading expenditure can only be offset against the company’s corporation tax liability.

 

4. Payments to universities to carry out R&D in a relevant Member State will be allowable up to the greater of 1) 15% of the company’s own in-house R&D expenditure or 2) €100,000.

At present this restriction applied is the greater of 1) 5% of the company’s own in-house R&D expenditure or 2) €100,000.

  R&D Tax Credit Update 

 

1. Recent statistics published by Revenue for 2017 show further fall in the total exchequer cost of the R&D Tax Credit 

The Revenue Commissioners recently published statistics showing that while the number of companies that claimed the R&D Tax Credit in 2017 (1,505) was consistent with 2016 (1,506), there was a significant drop in the total exchequer cost of the R&D Tax Credit between 2016 (€670m) and 2017 (€448m). 2016 had itself marked a sharp decline from 2015 when the total exchequer cost peaked at €708m.

Table 1 below shows the number of companies that claimed the R&D Tax Credit and the total exchequer costs for 2005 to 2017 inclusive. As shown in Table 2, large companies (250+ employees) appear to have been hit hardest by these declining numbers.

Table 1. R&D Tax Credit - Total Excehquer Cost and Number of Companies claiming

Table 1, R&D Tax Credit - Total Exchequer Cost and Number of companies claiming

 Table 2. Breakdown of R&D Tax Credit by size (based on employee numbers) of claimant

Table 2, Breakdown of R&D Tax Credit by size (based on employee numbers) of claimant 

 

2. Revenue issue "clarification" regarding the treatment of European Commission grants in R&D Tax Credit claims

S766(1)(b)(v) TCA, the section of legislation covering grants, states the following:

 

“expenditure shall not be regarded as having been incurred by a company if it has been or is to be met directly or indirectly by grant assistance or any other assistance which is granted

by or through—

(I) the State or another relevant Member State, or

(II) any board established by statute, any public or local authority or any other agency of the State or another relevant Member State;

 

Earlier today, Revenue issued eBrief No. 129/19 confirming that the section of the Tax and Duty Manual dealing with the treatment of grants for R&D Tax Credit purposes has been updated to include the following footnote:

 

“European Commission grants may not fall within the definition of section 766(1)(b)(v) TCA 1997, this will be dependent on the terms and conditions as set out in each grant agreement.”

 

Therefore, if you are in receipt of grants from the European Commission or are considering applying for such grants, it is important that you consider the potential impact of this updated guidance on your R&D Tax Credit(s).

Revenue eBrief No. 129/19 can be accessed here https://www.revenue.ie/en/tax-professionals/ebrief/2019/no-1292019.aspx

 

2.      

Latest Version of R&D Tax Credit Guidelines now available 

 

The latest version of the R&D Tax Credit Guidelines (“the guidelines”) have now been published by the Revenue Commissioners (“Revenue”) today, Wednesday 6th March 2019. The updated guidelines, now incorporated directly within the Tax and Duty Manual (Part 29-02-03), can be accessed here.

Although not legislation, the guidelines provide useful insights into Revenue’s present thinking on key issues pertaining to the R&D Tax Credit. 

Appendix 4 of the document contains a list of all the updates that have been made. We recommend that you take the time to carefully review all the changes to assess the impact, if any, on your claims and your claim process.

To assist with your review, we highlight below what we see as some of the more significant changes: 

 

 

1. Supporting Documentation

The importance of retaining contemporaneous documentation to support that the Science Test and the Accounting Test have been complied with has always been highlighted within the guidelines. However, in the latest version, guidance on this point has been significantly expanded and a “suggested file layout for R&D Tax Credit claims” added as an Appendix 3. As stated in the notes to the Appendix:

 

“This suggested file layout is based on Revenue’s experience reviewing R&D tax credit claims. It is a basic guide to the contemporaneous documentation that Revenue would expect to see: documentation that should be retained when completing activities in respect of which it is intended to make a claim under S.766 and S.766A TCA 1997 and Part 9 Chapter 5 TCA 1997. There is no requirement to keep the documentation in this format. The format is illustrative and is provided as guidance for those who wish it. Not all questions will be applicable to all industries, all companies or all projects. As each R&D project is by definition unique, further supplementary/clarifying information may be requested.”

 

It is important to note that this file does not have to be submitted to Revenue when making the R&D Tax Credit claim. However, we recommend that all companies familiarise themselves with the contents of Appendix 3 as it is likely to effectively become a checklist used by Revenue when auditing claims.

Some points to note in relation to this new suggested file layout:

  • “Timesheets” are explicitly referenced for the first time in the guidelines (See Question 18).
  • Maintaining evidence of the benchmarking exercise carried out at the outset of a project to establish that a solution to the scientific/technological uncertainty did not exist is key to preparing/supporting a claim. In the April 2015 version of the guidelines, a “comprehensive literature review” was provided by Revenue as an example of what they might expect to see in this regard. The latest guidelines also include this reference to a literature review. However, further examples are now also provided, as follows:

“Extensive search on the internet resulted in no known solution, it is imperative to print and retain the results of the internet search as these results for that period cannot be recreated at a later date”;

“Researched competitors in the field”; and

Retain details of journal searches

 

  • While many questions included in the suggested file layout will be very familiar to claimant companies (e.g. start/end dates of R&D activities, the field of Science/Technology involved), others may be less so.For example, question 6(b) introduces, for the first time in the context of the R&D Tax Credit, the concept of Technology Readiness Levels (“TRL”), stating:

 

“Identifying which step on the TRL scale the R&D process is operating, may be beneficial, when identifying if it is eligible as qualifying R&D expenditure under S.766 TCA 1997:

  • Idea
  • Basic Research
  • Technology Formulation
  • Applied Research
  • Small Scale Prototype
  • Large Scale Prototype
  • Prototype System
  • Demonstration System
  • First of a Kind Commercial System
  • Full commercial application”

 

Since first being introduced by NASA in the 1980s as a means of measuring how far a technology was from being space ready, the intervening years has seen the adoption of the TRL scale (or variants thereof) by many sectors. More recently, the TRL scale has been used by the European Union in implementing its innovation policy.

However, in our experience, the formal use of a standardised TRL scale by R&D performing companies is not ubiquitous. Also, there is little precedent available regarding the application of the TRL scale to R&D Tax Credit claims. As stated in the Frascati Manual 2015:

“Different TRL models have been developed to help assess the maturity of the technological elements of such programmes, but remain largely untested in other domains”; and

“Because of the multiplicity of TRL classification systems and their generic description, it is not possible to provide a concrete and generally applicable mapping of TRLs – or more specifically the work conducted in order to bring the programme to a higher readiness level – to the types of R&D (basic research, applied research and experimental development”).

We would have liked to have seen more detailed guidance on the application of the TRL scale to R&D Tax Credit claims.

 

2. Materials used for R&D that may subsequently be sold (Section 4.7)

The guidance in Section 4.7 relating to materials used for R&D that may subsequently be sold has also been expanded upon and new examples provided.

We highlight in bold below the new wording added to the section:

"Materials used in qualifying research and development activities may be of further commercial value after their research use has concluded. In those cases, it must be determined if those materials were utilised wholly and exclusively in the carrying on by the company of qualifying research and development activities.

Where it is reasonable to consider that there will be a saleable product, then the lower of cost, or net realisable value of any materials or other saleable product which remain after the R&D activity should be deducted from the expenditure claimed.”

Examples No. 14, No. 15. and No. 16 are new and seek to provide the reader with practical examples as to the application of the guidance contained in the section.

Given the significant sums that can be involved and the potential impact on the R&D Tax Credit, it is crucial that the cost of materials is treated correctly in R&D Tax Credit claims. The fact that Revenue have expanded guidance and provided new examples on this issue suggests that they may have some concerns regarding certain current practices in this area.

 

3. Innovation

In the “New Materials / products / systems” section of the guidelines (see Section 3.6), Revenue has always highlighted that new materials, products and systems do not qualify for the R&D Tax Credit purely on the basis that they are new and/or that “science or technology has been used in its creation”.

In the guidelines published today, Revenue has expanded on this point to confirm that “in many cases these projects will be innovative rather than qualifying R&D”. In the footnote to the relevant page, readers are directed to a definition of “innovation” that has recently being added to S488 of the Taxes Acts.

Of course, many innovative projects will include R&D (as defined for tax credit purposes). However, arguing the case for project eligibility entirely based on a material, product or system being new or innovative is not recommended. It is important to be able to show that all criteria set out in the legislation have been fully complied with. Given the updated guidance in this section and the fact that “innovation” is now explicitly referenced, it is likely that this will continue to be an area of interest for Revenue in audits and other interventions going forward.

 

4. Subcontracting R&D Activity

Section 6 of the guidelines has been updated and now states that:

“It is important to note that the outsourced activity must constitute qualifying R&D activity of the company which appointed the sub-contractor, and not necessarily R&D of the subcontractor”

This contrasts with the wording used in the previous version of the guidelines which stated:

It is important to note that the outsourced activity must constitute qualifying R&D activity in its own right”.

 

This section of the guidelines has also been updated to confirm that where outsourced activity is undertaken by someone who could not claim the R&D Tax Credit (examples given are an individual or a non-resident third party that does not have a branch in the State), the requirement to issue written notification does not apply.

5. Employee Secondments

Section 4.4. is a new section dealing with employee secondments. It states that if an individual is seconded to a company undertaking R&D activities and the costs of that person’s employment are borne by the company undertaking the R&D activities, they will be treated as direct employee costs, provided the following conditions are met:

1) The individual undertakes their duties in Ireland, and

2) The individual must contribute specialist knowledge, to a specific R&D project being undertaken by this in-house team.

6. Penalty Application

Section 8.7. is another new section that deals with the application of penalties in situations where a R&D intervention results in a settlement. It is now stated that "penalties will apply in line with legislation and the code of practice, publication may also apply. Where the penalty chargeable is on a ‘specified amount’ for the purposes of section 1077E(11) and section 1077E(12) the amount of credit will be deemed to be a reference to an amount of tax."

If you have any queries or comments in relation to the new guidelines please do not hesitate to get in touch on (01) 4100993 or e-mail me at This email address is being protected from spambots. You need JavaScript enabled to view it.

Latest figures show fall in Research and Development Tax Credit claims

Recently published R&D Tax Credit statistics have revealed a reduction in both the number of companies claiming the tax credit and the total amount being claimed. The number of claimant companies fell from 1,535 in 2015 to 1,506 in 2016. There was a corresponding decrease in the Total Exchequer Cost from its peak of €708m in 2015 to €670m in 2016. Table 1 below shows the Total Exchequer Cost and Number of Companies claiming the tax credit since its introduction in 2004.

Some other interesting findings include:

  • 78% (€523m) of the 2016 R&D Tax Credits were claimed by 125 large companies (> 250 employees). Table 2 below shows a breakdown of the 2016 R&D Tax Credit by size (based on employee numbers) of the claimant.

 

  • In 2016, 61 companies claimed a R&D Tax Credit of more than €1,000,000. However, the majority of claims (1,070 of the 1,506) were for less than €100,000. Table 3 below shows a breakdown of the 2016 R&D Tax Credit by value of credit used.

 

  • 64% (or €434m) of the total R&D Tax Credits claimed in 2016 were used to offset corporation tax in that accounting period (as opposed to being claimed as payable tax credits). This represents a significant increase from 2015 when 49% (€349m) was used to offset that year’s corporation tax liabilities.

 

 

Table 1. R&D Tax Credit – Total Exchequer Cost/Number of Companies

Year

Total Exchequer Cost (€m)

Number of Companies

2004

71

73

2005

65

135

2006

75

141

2007

166

479

2008

146

582

2009

216

900

2010

224

1,172

2011

261

1,409

2012

282

1,543

2013

421

1,576

2014

553

1,570

2015

708

1,535

2016

670

1,506

 

 

Table 2. Breakdown of 2016 R&D Tax Credit by size (based on employee numbers) of the claimant

Number of Employees

Claimants

Cost of R&D Tax Credit (€m)

Less than 10

470

38

11 to 49

550

48

50 to 249

334

61

250+

152

523

Total

1,506

670

 

 

Table 3. Breakdown of 2016 R&D Credit by value of credit used

Value of Credit Used

Number of Companies

€1 to €10,000

284

€10,001 to €100,000

786

€100,001 to €200,000

207

€200,001 to €300,000

71

€300,001 to €400,000

24

€400,001 to €500,000

24

€500,001 to €1,000,000

49

€1,000,000+

61

Total

1,506

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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Taylor's Lane, Dublin 8, IrelandGuinness Enterprise Centre