The recession has hit small businesses and early-stage ventures hard, and we have seen many casualties as a result of lack of finance and poor use of the limited resources available to smaller businesses. One such under-utilised resource is the Research & Development (R&D) Tax Credit. Written by Emily McElroy Business, Development Consultant, KPMG
Introduced in 2004, the R&D Tax Credit (“the credit”) is an important incentive that supports and drives innovation and employment-generation in a broad cross-section of Irish industry.
AN UNDER-UTILISED RESOURCE
Despite the almost universal scope of the credit across a wide range of industries, the most recent R&D Tax Credit survey, commissioned by KPMG in October 2010 and carried out by RedC, found that there are twice as many companies claiming R&D grants compared to companies claiming the R&D Tax Credit. This suggests that many companies may be leaving valuable credits and cash unclaimed, particularly as grant-qualifying R&D projects often also qualify for credits. [View the report: Take a Closer Look 2010/11]
HOW DOES IT WORK?
The scheme works by giving companies that are resident in Ireland 25 per cent of the amount they spend on incremental R&D over a given accounting period. In the first instance the credit is offset against corporation tax; in cases where there is little or no corporation tax liability, companies can generally receive a cash payment from Revenue.
To calculate your incremental spend, you take your R&D spend in the relevant accounting period. From this, you subtract your corresponding R&D spend in the base year, which is generally an accounting period in 2003.
For example, a company with an R&D spend in 2011 of €60,000 and R&D spend in 2003 of €10,000 could potentially claim up to €12,500 in tax credits or by way of a cash refund (i.e. 25% of €50,000). This is not an insignificant source of finance for cash-strapped firms that are reliant on innovation.
WHO CAN CLAIM?
Companies in a wide range of sectors can avail of the scheme, and there is no restriction on how much or how little you spend. The R&D Tax Credit scheme operates by way of self-assessment; a company simply includes the amount of credit that it is entitled to claim in its corporation tax return. There is no requirement to submit any other documentation when claiming the credit. There is, however, a requirement to maintain specific detailed documentation to support the claim. We would advise companies to seek professional advice before submitting an R&D claim, as it can be a complex area with significant consequences if a claim is incorrectly compiled.
What is the relevance of the base year?
The purpose of the 2003 base year was to encourage companies to increase investment in R&D over and above existing 2003 levels. For companies that did not conduct R&D in 2003 and those that did not yet exist in 2003, there is generally a ”zero base”, that is to say all R&D-related expenditure should be allowable for the purposes of the credit.
WHAT ARE CONSIDERED ELIGIBLE ACTIVITIES?
There are strict criteria that must be met in order for an activity or project to be considered “R&D” for the purposes of the credit. The main areas in which R&D tends to occur in Ireland are the development of new, and enhancement of existing products, processes, and systems.
Examples of product related R&D include the development of new flavours for food and drinks products, significant improvements to agricultural machinery, and the development of enhanced leading edge plastic moulding solutions.
Examples of process and systems related R&D could include the development of a high-speed production process for ready meals, new sterilisation techniques, and the development and optimisation of software applications.
What are the eligible industry sectors?
The type of R&D that can qualify for the credit is carried out by a wide range of industry sectors, including (but not limited to):
- Food and drink
- Software development
- Waste management/recycling
- Renewable energy
- Medical devices
This list is by no means exhaustive; given the potential value of the credit and the cash refund, it is certainly worth your while investigating your eligibility. To see if your business qualifies for the R&D Tax Credit, try our R&D Tax Credit Assessor.
What are the most common pitfalls?
Common errors made during the claim process include:
- Overlooking eligible activities and therefore undervaluing the claim.
- Failing to properly identify R&D activities in accordance with relevant tax legislation and Revenue guidelines.
- Incorrect inclusion and/or treatment of certain types of expenditure.
- Having insufficient supporting documentation to substantiate the claim.
- Failing to establish an entitlement to claim; this is a complex tax technical area which interacts with other tax legislation.
- Filing a claim with Revenue in an incorrect manner.
SHOULD I EXPECT A REVENUE AUDIT?
It is important to note that Revenue are entitled to audit an R&D Tax Credit claim for up to four years after the submission is made and in our experience they frequently exercise this right. Audits usually consist of a rigorous review of the tax, financial, and scientific/technological aspects of the claim. While an audit tends to be very thorough, to the extent that the claim has been made in an appropriate manner, it should not be a cause for undue concern. We would advise companies to expect an audit of the claim as a matter of course, as it is clear that Revenue are exercising increased vigilance in this area. For more information, see ‘R&D Tax Credit Revenue Audits’.
WHAT ARE THE IMPLICATIONS OF AN INCORRECT CLAIM?
Under-claiming: You may not have claimed the full cash value that you are entitled to and are missing out on a valuable refund.
Over-claiming and/or filing an unsupportable claim: If your claim is audited by Revenue, you may be leaving yourself open to repayment of the credit in addition to interest, penalties and, in extreme cases, publication on the list of tax defaulters.
WHAT’S THE NEXT STEP?
We would encourage companies that are considering making an R&D Tax Credit claim to seek professional advice.
A version of this article first appeared in the 19 June 2011 edition of The Sunday Business Post.