Many companies fail to realise that their Research and Development activities could qualify for valuable tax incentives, explains Edward Murphy, Partner and Head of Tax Services.

Ireland has a well established reputation as a friendly environment for innovative businesses. Government strategy, set out in Innovation 2020, is to nurture excellent research in strategically important areas that benefit the economy and society. A key ambition is to increase investment in research and development and, to this end, Government works with, and funds, various programmes through agencies such as Enterprise Ireland, Science Foundation Ireland, IDA Ireland, InterTrade Ireland and the Higher Education Authority. In addition, research and development tax incentives are available to help develop business and attract high quality jobs. Two of the most important of these incentives are the Research & Development Tax Credit regime and the Knowledge Development Box.

R&D Tax Credit

If your company spends money on research and development activities, you may qualify for a Research and Development (R&D) Tax Credit. This scheme is administered by the Irish Revenue Commissioners and is open to companies who are liable to Irish tax and carrying out qualifying R&D activity in Ireland and/or the European Economic Area (EEA).

The credit is calculated at 25% of qualifying expenditure and is used to reduce your company’s liability to Corporation Tax.

If you have insufficient Corporation Tax against which to claim the R&D tax credit in a given accounting period, the credit may be set against the Corporation Tax for the preceding period. It can also be carried forward indefinitely or, if your company is a member of a group, it can be allocated to other group members.

In some circumstances, the R&D credit can also be claimed as a payable credit.

Qualifying research and development activities must meet certain conditions, such as:

  • involve systemic, investigative or experimental activities
  • be in the field of science or technology
  • involve basic research and/or applied research and/or experimental development
  • seek to make scientific or technological advancement
  • involve the resolution of scientific or technological uncertainty.

To claim the R&D tax credit, it is not necessary to hold the intellectual property rights resulting from the R&D work. It is also not necessary for the R&D work to be successful. The credit is claimed using the Revenue Online Service (ROS). However, before submitting a claim it is important to check that you meet the requirements and have all the necessary supporting documentation. While this may appear onerous, a good tax advisor can guide you through the process. Paying attention to detail when submitting your claim can help avoid Revenue queries and/or a Revenue audit.

Knowledge Development Box

The Knowledge Development Box (KDB) is a tax relief which reduces the Corporation Tax payable on a company’s income from qualifying patents, computer programmes and, for smaller companies, certain other certified intellectual property (IP). Ireland’s KDB was the first IP regime to be fully compliant with new international tax standards and ranks favourably with similar schemes in other countries.

If your company qualifies for the KDB regime, you can avail of a deduction equal to 50 percent of your qualifying profits. In effect, this reduces the normal Corporation Tax rate of 12.5 percent to 6.25 percent on qualifying profits.

For KDB purposes, qualifying assets are those created from R&D activities such as:

  • a computer programme
  • an invention protected by a qualifying patent
  • IP for small companies which is certified by the Controller of Patents as patentable, but not patented.

Marketing related IP such as trademarks, brands, image rights and other intellectual property used to market goods or services are not considered to be qualifying assets.

To apply for the KDB, you must submit your claim on your Corporation Tax return via the Revenue Online Service (ROS). As with R&D tax credits, before submitting a claim it is important to check that you meet the requirements and have all the necessary supporting documentation.

Conclusion

Companies sometimes mistakenly believe that they are not engaged in research and development because they do no operate in industries such as pharma or technology. However, in many instances, companies in other sectors such as manufacturing, energy, financial services, agribusiness, food and drink, are eligible for R&D tax credits and/or the Knowledge Development Box. While navigating the conditions attached to submitting a claim can appear daunting, these are valuable incentives both for indigenous Irish SMEs and for multinationals and are therefore well worth considering.

Talk to us

Edward Murphy
Partner and Head of Tax Services
edward.murphy@crowleysdfk.ie

The Knowledge Development Box (Certification of Inventions) Act has been enacted by the Oireachtas. This legislation will allow small and medium sized companies engaged in research and development activities to avail of the Knowledge Development Box.

 

The Finance Act 2015, introduced the Knowledge Development Box and this included a provision for small and medium sized companies to avail of the Knowledge Development Box with respect to unpatented inventions and avail of the effective rate of 6.25% in respect of qualifying profits. A small and medium sized company is defined as:

  1. A company with income from intellectual property (IP) not exceeding €7.5 million;
  2. A company with fewer than 250 employees;
  3. Turnover not in excess of €50m.

These limits also apply where the company in question is a member of a group.

This legislation will enable the Controller of Patents, Designs and Trade Marks (the “Controller of Patents”) to certify that an invention is novel, non-obvious and useful. The invention (IP) is not required to be protected by patent.

An application for the certification referred to as the “KDB Certification” must be accompanied by an opinion and supporting evidence from a patent agent confirming in their view the invention is novel, non-obvious and useful. A KDB certificate may only be issued in respect of one invention or group of inventions if the inventions are linked to form a single inventive concept.

The Act sets out four items in particular that would not be regarded as meeting these criteria:

  1. A discovery, scientific theory or mathematical method;
  2. An aesthetic creation;
  3. A scheme, rule or method for performing a mental act, playing a computer game or doing business, or a program for a computer;
  4. The presentation of information.

As the IP is not protected by patent, the Controller of Patents is required to keep all applications, KDB certificates and refusals to issue KDB certificates confidential. Therefore, companies can be assured that details of their invention disclosed in a KDB certificate application should be kept confidential.

The Act also makes some amendments to the Patents Act 1992, to allow for the controller of patents to grant patents following a substantial examination for novelty. Thus, ensuring that Irish patents will fall within paragraph (a) of the definition of “Qualifying Patent” in section 769G of the Taxes Consolidation Act 1997.

For further information on the above article or any other issue surrounding the Knowledge Development Box, please contact Caroline Butler.

Caroline Butler
Assistant Manager, Tax Services
+353 1 6790800
caroline.butler@crowleysdfk.ie