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Finance Bill 2015 – The Knowledge Development Box

 

Last year,  Minister for Finance, Michael Noonan announced the introduction of a Knowledge Development Box (“KDB”). We were told that under the KDB, a reduced rate of corporation tax would apply to profits from Patents and other qualifying IP assets. Since then we have been awaiting further information, including key details such as the IP assets and income that will qualify under the new scheme.

 

In the Finance Bill published yesterday, the 22nd October 2015, we finally got to see the proposed KDB legislation. The legislation has not been enacted and is subject to change. However it gives useful insight into how the scheme will operate. As the intention is for the KDB to apply to accounting periods commencing after 1 January 2016, it is important that companies familiarise themselves as soon as possible with the legislation.

 

Below we set out 10 key features of the KDB contained in the Finance Bill. We also provide links to the Finance Bill and the explanatory memorandum that were published yesterday.

 

10 Key Features of the KDB

 

1: The Knowledge Development Box (“KDB”) is to apply to accounting periods commencing after 1 January 2016. Qualifying Income will be effectively taxed at 6.25%.

 

2. Copyrighted software resulting from R&D is included in the list of qualifying assets to benefit from the reduced effective tax rate. The list also includes certain patents, SPCs and plant breeders’ rights.

 

3. In addition to the above IP assets, “Small Companies” can also benefit from the reduced effective tax rate on “inventions that are certified by the Controller of Patents, Designs and Trade Marks as being novel, non-obvious and useful”.

 

4. Along with royalties and licence fees, qualifying income may also include a portion of the sales proceeds of products/services to the extent that they relate to a qualifying IP asset. Insurance, damages or compensation relating to a qualifying IP asset may also qualify.

 

5. If expenditure is incurred on acquiring IP that is reflected in the value of the qualifying IP asset and/or the R&D is partially carried out by other group companies, the profits qualifying for the reduced rate may reduce in accordance with a prescribed formula.

 

6. Qualifying income/expenditure must be calculated on an asset by asset basis. However it may be possible to group a “family of assets”. A "family of assets" are two or more qualifying assets that are so interlinked that it is not possible to separately identify income/expenditure for each asset.

 

7. Claims must be made within 12* months of the end of the accounting period to which the claim relates. *This has since been increased to 24 months

 

8. For patents, claims can be made either a) in the accounting period in which the application is submitted or b) the accounting period in which the application is granted.  If option a) is used and the patent application is subsequently rejected, the additional tax will need to be paid along with any interest falling due. If a company chooses to use option b), assessments will be amended for all years in which qualifying arose. A protective claim must be filed for each intervening accounting period prior to the application being granted outlining the allowances due.

 

9. Only companies to which transfer pricing provisions apply are obliged to use transfer pricing legislation in determining the market value of IP, apportioning income for embedded IP etc. SME companies are therefore not subject to these requirements.

 

10. The legislation will prescribe supporting documentation that must be maintained in relation to every claim.

 

 

 

We are hiring!  Come join our market leading R&D Tax Credit team.

Have you a keen interest in science and being able to explain how technology works? Are you inspired by innovation and cutting-edge technologies? Do you enjoy exploring complex ideas and translating them into simple concepts? If so, this could be the job for you.

SciMet R&D is the leading, Irish owned, independent R&D Tax Credit consultancy. We work with many of Ireland’s most dynamic and innovative companies in securing their R&D Tax Credits. Don’t let the word “tax” put you off, the R&D Tax Credit has science and technology at its core and this is where you come in. As part of our multi-disciplinary team of experienced R&D Tax Credit professionals, you will deliver market leading, bespoke services to our clients. Your duties and responsibilities will include the following: 

  • Working closely with clients to optimise the efficiency and robustness of their claim process;

  • Investigating projects undertaken by clients to assist in the identification of those that meet the definition of R&D activities for tax credit purposes;

  • Assisting with the preparation of an R&D Tax Credit Report, setting out the basis to the claim from a science perspective;

  • Supporting claims in the event of a Revenue audit/enquiry

    This is a client facing role so excellent communication skills are a must. You should be able to demonstrate a proven track record of working to tight deadlines, both as part of a team and using your own initiative.

This is a great opportunity to join a growing team and to establish yourself as an expert in the niche area of R&D Tax Credits. While prior experience of R&D Tax Credits would be an advantage, it is not compulsory as full, extensive training will be provided.

SKILLS AND EXPERIENCE REQUIRED

  • Qualified scientist/engineer with a background in one or more of the following: Life Sciences, Biotech, Electronic Engineering, Computer Science, Food Science, Mechanical Engineering.

  • Passionate about science, technology and innovation;

  • Excellent communication, both spoken and written;

  • A team player with the ability to work on own initiative;

  • The ability to work to tight deadlines.

If interested in this role please send a copy of your CV to Eoin Brennan at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Revenue Commissioners make further updates to R&D Tax Credit Guidelines

Following their major revision of the R&D Tax Credit Guidelines earlier this year, Revenue published an updated version of the guidelines yesterday, 24th March 2015. Changes have been made to a number of sections to provide further clarity on certain aspects of the new guidance issued in January. At SciMet R&D we welcome the prompt move by Revenue to provide additional clarification on these important points. The changes made are as follows:

Section 2.7 Time Limit on claims and timeframes for payable credits

The version of the guidelines that issued in January included the following statement in relation to payable tax credits:

“Claims for the three instalment payable credits can be paid not earlier than the 21st day of the 9th month following the end of the relevant period and 12 months and 24 months following the date the first instalment was paid” 

SciMet R&D raised concerns with Revenue that this wording could suggest that it is the date the first instalment is actually paid that serves as a reference for determining the 12 and 24 month anniversaries on which the second and third instalments respectively could be received. If this was the case, it could negatively impact the cash flow of companies where the payment of the first instalment is delayed e.g. as may occur where a Revenue audit into the claim is ongoing.

The section of the guidlines has been updated and now states the following:

“Claims for the three instalment payable credits can be paid not earlier than the 21st day of the 9th month following the end of the relevant period, and 12 months and 24 months respectively following that date.

As can be seen, the reference to the date the first instalment was paid has been removed. This section of the guidelines is now consistent with the relevant tax legislation in that it is the date that the first instalment is payable that is the reference for determining payment dates for the second and third instalments.

Section 4.2 Employee/Staff Costs

January’s guidelines included the following statement with regards to determining the qualifying R&D staff costs to be included in the tax credit:

“Emoluments also include holiday entitlement, public holidays etc., therefore for a full time employee, the total cost of the employment is spread over 52 weeks (pro-rata for a part-time employee).”

SciMet R&D highlighted to Revenue that this reference to spreading the total cost over 52 weeks (pro-rated for part-time employees) could be interpreted to mean that staff holidays etc. should always reduce the qualifying R&D staff costs included in the claim. This is because instead of using the proportion that the time an employee is engaged in qualifying R&D activities bears to total worked time when calculating qualifying R&D staff costs, the denominator in calculating the proportion would be the full 52 weeks (including holidays etc.).

In the latest version of the guidelines, the reference to spreading the total cost of employment over 52 weeks (and pro-rata for part time employees) has been removed.

Section 5 Buildings and Structures Used for Research and Development

A significant change has been made to section 5 of the guidelines, which now state that:

Qualifying expenditure on the construction or refurbishment of a qualifying building may be treated as having been incurred either:-

(i) on the date it was actually incurred, or

(ii) on the date the building was first brought into use for the purposes of a trade, or the refurbishment is completed as appropriate.”

This differs from January’s guidelines where it was stated that “the credit is available, commencing from the date on which the building is first brought into use for the purposes of a trade”. This clarification that qualifying expenditure can be treated as having been incurred on the date it is actually incurred is welcomed and may be of particular relevance to R&D companies involved in construction projects that span two or more periods.

 

 

SciMet R&D in the Sunday Business Post, 18th January 2015

SciMet R&D had an article in yesterday's Sunday Business Post to make readers aware that the new R&D Tax Credit guidelines were published last week. Given it is that time of year, we also took the opportunity to highlight a few "resolutions" to help keep R&D Tax Credits "healthy" in 2015.

There was one piece of "journalistic licence" applied to our article that we think is worth clarifying. In the Experimental Development paragraph, it is stated that experimental development can be difficult to identify due to its "similarity" to non-qualifying activities.  In our article we had highlighted that it is the "proximity" of experimental development to other activities, i.e. in the NPD cycle, that presented challenges. Experimental Development is of course not similar to  non-qualifying activities as evidenced by the large number of successful claims made for these type activities. Not too sure why they changed it prior to publishing but there you go!

Download the full Pdf version of the article here

 

 

New R&D Tax Credit Guidelines published by the Revenue Commissioners today, 14th January 2015

 

The updated Research and Development Tax Credit Guidelines were published by the Revenue Commissioners today, the 14th January. The updated guidelines can be accessed on the Revenue website at www.revenue.ie. They contain additional guidance on certain key areas and some useful worked examples. Below we highlight some of the main changes from previous versions of the guidelines.

Payable Credits (Section 2.4)

A number of worked examples are provided showing how the payable tax credits are computed and in particular, the restrictions to the amounts receivable as cash (see examples 7 and 8)

Order of Offsets (Section 2.8)

Previous versions of the guidelines did not deal with the order of offset where a company has a current year tax credit, a carry forward of payable tax credits from the post 2009 period and a carry forward of non-payable tax credits from pre-2009. Example 11 shows that after the current year tax credit has been used, the pre-2009 non-payable tax credit can then be used in priority to the payable tax credits carried forward.

Software (section 3.7)

Additional guidance is provided for R&D Tax Credit claims made in the software sector. This includes:

  • An emphasis on the importance being able to identify not only those developments that result from qualifying activity but also the software development life-cycle phases that qualify.
  • Recognition that agile development methodologies are systematic in nature (one of the requirements for activities to qualify for the tax credit).
  • Examples of technological uncertainties (another of the requirements for activities to qualify for the tax credit) that may arise during the development life-cycle.
  • Examples of features in the development life-cycle that in Revenue’s view do not constitute qualifying R&D activity.
  • The importance of distinguishing between qualifying and non-qualifying activities, that may be taking place simultaneously in agile development methodologies, is highlighted.

Employee Staff Costs (section 4.2)

Revenue provide guidance on the emoluments to be included when calculating the R&D staff costs. They state that “pension contributions, bonus payments, health insurance or other items included in the reward package paid to R&D employees” may be included. In Note 18 to the guidelines, Revenue advise that where payments made to proprietary directors (or other persons with control over their emoluments) are significantly out of step with normal emolument practice of the company, these payments will generally not be regarded as eligible expenditure.

Revenue state that it is their view that as emoluments also include holiday entitlement, public holidays etc. the cost of employment for a full time employee should be spread over 52 weeks (pro-rated for a part-time employee).

Revenue also state that it is their view that overhead costs associated with the employment of an individual, such as HR costs, payroll team costs, canteen costs are not considered eligible as they are incurred “in connection with” as opposed to “in the carrying on by it” of the activity”.

Agency Staff (section 4.3)

Revenue confirm that the use of agency staff is an outsourcing of R&D activities and therefore the related payments should be subject to the restrictions that apply to these payments (i.e. the greater of €100,000 or 15% of in-house R&D expenditure).

Individual Consultants (section 4.3.1)

The updated guidelines set out the conditions that must be met for costs relating to individual consultants hired on a part-time/short time basis to be treated as direct employee costs (no restriction) as opposed to outsourced costs (restricted).

Materials used in R&D Activities which may be subsequently sold (section 4.6)

In the guidelines Revenue recognise that materials used for R&D may have a commercial value after the R&D has concluded. They advise the expenditure to be included in the claim in relation to such material should be reduced by the lower of a) the cost of the materials or b) the net realisable value of any materials or other saleable product which remains after the R&D activity.

R&D carried on as part of an Existing Trade (section 4.7)

Revenue state that where R&D is being carried on as part of the trade activities of a company, the eligible expenditure is limited to the additional expenditure that is incurred wholly and exclusively in carrying on the R&D. They give an example of a situation where R&D is being undertaken on a live production line while saleable product continues to be produced. They advise that it is the increase in unsaleable product and additional time costs that can be shown to have been incurred in the carrying on of the qualifying R&D that may be eligible.

Buildings and Structures used for R&D (section 5.1)

Revenue confirm that where expenditure on the construction of a building is incurred over two or more accounting periods, the aggregate expenditure is treated as incurred from the date the building is brought into use. The 12 month time limit for making a claim under S766A applies by reference to the date that the expenditure is treated as incurred.

Plant and Machinery (section 5.3)

The updated guidelines confirm that expenditure on plant and machinery (“P&M”) may be treated as incurred either on a) the date the P&M is brought into use and b) the date the expenditure becomes payable. Option b) can only be used where the P&M is brought into use within two years. This option was originally provided in Tax Briefing No. 59 from 2005.

Changes to Group Structure (section 7.7)

As provided in last year’s e-brief, Revenue confirm that where a company is disposed of by one group and acquired by another, any base year R&D expenditure of the company remains with the old group and does not pass to the new group. They state that this is not the case where there is common control of the two groups.

The Science Test (section 8.1)

The updated guidelines confirm that the company’s supporting documentation should evidence that the scientific/technological advancements had not previously been achieved and that the scientific/technological uncertainties had not previously been resolved (or if resolved, that the resolution was not available to a competent professsional working in the field) prior to the company commencing its project. Evidence that a comprehensive literature review was conducted prior to commencing the project is given as an example of the type of records to be retained.

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:
Guinness Enterprise Center
Taylor's Lane, Dublin 8, IrelandGuinness Enterprise Centre