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Revenue publishes further guidance on rental costs and other key issues 

 

Part 29-02-03 of the Tax and Duty Manual (aka “the R&D Tax Credit Guidelines” or “the Guidelines”) has been updated with several changes that all companies intending on making an R&D tax credit claim should be aware of. A summary of these changes is set out below.

 

1. Rental Costs

 

It was the July 2020 version of the R&D Tax Credit Guidelines where many first became aware that Revenue might have an issue with the inclusion of rental costs in R&D Tax Credit claims with the addition of the following line:

 

“Rent is expenditure on a building or structure and is excluded from being expenditure on research and development by section 766(1)(a) TCA 1997”

 

This “clarification” came as a somewhat of surprise given that the legislative basis was unclear and that it seemed to contradict established practice whereby a just and reasonable apportionment of rental costs would have been included as expenditure on R&D in historic claims. The confusion was exacerbated further by the fact that many companies would have had claims audited by Revenue down through the years where, while queries may have arisen regarding apportionment methods used etc., there was never a suggestion that rental costs were prohibited by the Taxes Acts.

 

In this latest version of the R&D Tax Credit Guidelines, Revenue state that it remains its view, at this time, that there are circumstances where rental costs should not form part of R&D Tax Credit claims. The reason provided has changed, with the following now included in a new Section 4.2 of the Guidelines:

 

“In many cases expenditure incurred on renting a space or facility, which is used by a company to carry on an R&D activity, may be expenditure that is incurred “for the purposes of”, or “in connection with”, the R&D activity but will not constitute expenditure incurred wholly and exclusively in the carrying on of the R&D activity. The eligibility of rental expenditure incurred by a company will relate to the extent to which it is incurred wholly and exclusively in the carrying on of the R&D activities.”

 

Revenue do go on to confirm its current view that there are other circumstances where it will likely be possible for rental costs to form part of R&D Tax Credit claims. They state:

 

Where the nature of the rented space or facility is such that it is integral to the carrying on of the R&D activity itself then it is likely that the rent can be shown to be more than merely “for the purposes of” or “in connection with” the R&D activity.

 

Where a company rents a specialised laboratory or a clean room in order to advance its R&D, the question to ask is whether or not the company could have undertaken the R&D activity without the specialised nature of the laboratory or clean room. If the activity could not have been carried out, then the specialised nature of the rented space can said to be integral to the R&D activity the company is carrying on and, to the extent that the expenditure is wholly and exclusively incurred in the carrying on of the R&D activity, rent may be qualifying expenditure”

 

Revenue ends the new Section 4.2 by confirming their current view that a company that rents an office space in which it carries on its R&D activities is likely prohibited from including an apportionment of the office rental costs in its claim as it is “unlikely to be able to demonstrate that there is anything specialised in the nature of the space that is integral to the R&D activities.” Revenue also confirms its current view that it is unlikely that a company undertaking qualifying R&D activities on a manufacturing process will be eligible to claim rent on the manufacturing facility as expenditure on R&D activities. The reason provided is that “While the R&D activities may not be undertaken away from the facility, the rent is not incurred wholly and exclusively in the carrying on of those R&D activities.”

 

2. The treatment of Temporary Wage Subsidy Scheme (TWSS) and the Employment Wage Subsidy Scheme (EWSS) in R&D Tax Credit claims

 

Revenue has updated the section of the R&D Tax Credit Guidelines dealing with grants (Section 2.6) to confirm its current view that:

 

Any monies received from the Temporary Wage Subsidy Scheme (TWSS) and the Employment Wage Subsidy Scheme (EWSS) are considered assistance from the State and therefore expenditure met from such assistance will not qualify for relief”

 

3. New example of subcontractor considered exempt from written notification requirements

 

Where a company intends including payments to unconnected third parties in its R&D Tax Credit claim, there is now a requirement to issue written notification to that third party on or before the date of payment confirming the fact and that the other party should not be claiming an R&D Tax Credit in respect of the same activities.

 

In previous versions of the Guidelines, Revenue confirmed its view that this written notification is not required where the outsourced activity is undertaken “by a person who could not claim the R&D tax credit”. The examples provided of “a person who could not claim the R&D Tax Credit” were:

 

  • “an individual”; or
  • “a non-resident 3rd party which does not have a branch in the State”

 

This exemption list has now been expanded to include:

 

  • “a recruitment agency providing staff”

 

4. Extension of specified relevant period due to Covid pandemic

 

S766A TCA 1997 provides, where certain criteria are met, for an R&D Tax Credit on expenditure on the construction or refurbishment of a building or structure used for qualifying R&D activity. One requirement of the section is that the R&D activities carried on by the company in that building or structure over a period of four years (referred to as the “specified relevant period”) represents at least 35% of all activities carried on in the building or structure.

 

Section 5.1 of the R&D Tax Credit Guidelines has been updated and it is now stated that:

 

“Where due only to the Covid-19 pandemic a company is not in a position to meet the ‘specified relevant period’ requirement for the year 2020, then the specified period may be extended to a five year period, and the requirement for R&D activities to represent at least 35% of all activities carried on in the building or structure over a four year period may exclude the year 2020 and the company can meet the requirement in the year commencing on the day after the ‘specified relevant period’ ends.”

 

Revenue ebrief No. 089/21 containing details of these changes is available on the Revenue website https://www.revenue.ie/en/tax-professionals/ebrief/2021/no-0892021.aspx

 

If you have any questions regarding these changes and how they may impact your R&D Tax Credit claims please get in touch on 0877582744 or This email address is being protected from spambots. You need JavaScript enabled to view it.

Revenue confirm that payment of R&D Tax Credit instalments due in 2021 can be expedited 

 

The Revenue Commissioners has confirmed that payment of R&D Tax Credit instalments due in 2021 can be expedited. As was the case in 2020, this welcome measure is being introduced due to the exceptional circumstances of the Covid-19 pandemic.

 

The Revenue Commissioners statement confirms that requests for accelerated payable credits will be "subject to appropriate checks in selected cases". Therefore, as is always the case when preparing an R&D Tax Credit claim, companies should ensure that only R&D activities as defined for the purposes of 766 TCA 1997 are included and that R&D expenditure is treated in full accordance with the relevant legislation. 

 

To ensure payment is received as promptly as possible, companies must also ensure the following:

  • A request to expedite payment of the R&D Tax Credit instalments is made through MyEnquiries.
  • The form CT1 for accounting periods ending in 2020 (and for accounting period ending up to March 2021) have been submitted at the time the request is made via MyEnquiries.
  • The request to MyEnquiries should be tagged as relating to 1)  "Corporation Tax" and more specifically 2) "R&D Instalments Payable in 2020 and 2021"

 

If you require any assistance with accessing your payable R&D Tax Credits please get in touch.

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. 

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.

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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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