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Update to R&D Tax Credit Guidelines - December 2020

Revenue have issued eBrief No. 236/20 regarding a number of changes that have been made to the Tax and Duty Manual Part 29-02-03 – Research and Development (R&D) Tax Credit (aka the R&D Tax Credit Guidelines). 

The changes relate primarily to the impact on R&D Tax Credit claims arising from the UK's withdrawal from the European Union. In summary, the updates confirm that there is to be no impact i.e. reference to "relevant member states" within the legislation shall effectively be construed as continuing to include a reference to the United Kingdom.

Another of the changes relates to the treatment of Plant and Machinery ("P&M) in R&D Tax Credit claims. It continues to be stated in Section 5.3 of the Guidelines that Revenue are prepared to accept that expenditure on P&M may be treated as incurred on either (1) the date the P&M is first brought into use for the purposes of a trade or (2) the date the expenditure becomes payable. Interestingly, the updated section of the Guidelines now states that this latter option is subject to a condition that the credit will be clawed back if the P&M is not brought into use for the purpose of a trade within four years of the expenditure becoming payable. Previously, the requirement was that the P&M be brought into use for the purpose of a trade within two years of the expenditure becoming payable. We have reverted to Revenue for confirmation that this increase to four years is intentional. 

A new paragraph has been added to Section 5.3 of the Guidelines confirming that "in the exceptional circumstance of the Covid-19 pandemic and subject to appropriate checks, Revenue may accept in certain circumstances that it was not possible to bring the plant and machinery into use for the purposes of the trade within the time limit of the expenditure becoming payable due to delays in the process caused solely by the pandemic."

Full details relating to eBrief No. 236/20 can be found here

Early Payment of R&D Tax Credit Instalments 

Revenue published ebrief No. 056/20 earlier today confirming that it may be possible to expedite payment of R&D Tax Credit installments due in 2020. This welcome measure has been introduced due to the exceptional circumstances being faced by companies in the midst of the Covid-19 crisis. 

Requests to expedite the payment of any 2020 instalments of excess R&D tax credits need to be made through Revenue's MyEnquiries. The form CT1 for the company’s accounting period ending in 2019 must have been submitted at the time of the request.

Full details are available here: https://www.revenue.ie/en/corporate/communications/covid19/revenue-services.aspx

Please contact us if you require further information.

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

 

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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