The R&D tax credit was introduced to incentivise large multinationals to locate an R&D unit here and to encourage Irish companies to invest in R&D activities.
Where a company meets the criteria to qualify for the R&D credit, it will be entitled to claim a tax credit equivalent to 25% of eligible expenditure incurred by it on qualifying R&D activities. As the claimant should also be entitled to claim a tax deduction at the standard rate of corporation of 12.5% on the same expenditure, it should result in an effective corporation tax benefit of 37.5%.
Is my company eligible to claim the R&D credit?
In order to qualify for the R&D tax credit the following must apply:
- The applicant must be a company
- The company must be within the charge to Irish tax
- The company must undertake qualifying R&D activities either within Ireland or the EEA
The expenditure on which the company is making the claim must be wholly and exclusively incurred in the carrying on by it of qualifying R&D activities. As per Revenue guidance, it is crucial that claimants distinguish the term “carrying on” from “for the purposes of” or “in connection with”. Indirect costs such as recruitment fees, insurance and travel costs, which are not wholly and exclusively incurred in the carrying on of the R&D activity do not qualify as relevant expenditure.
Typically, expenses which qualify for the R&D credit include, materials, salary costs, subcontracted R&D and plant and machinery.
What are qualifying activities for the purposes of the R&D credit?
Qualifying activities must:
- Be systematic, investigative or experimental activities;
- Be in a field of science or technology;
- Involve one or more of the following categories of R&D:
- Basic research
- Applied research
- Experimental development
- Seek to achieve scientific or technological advancement; and
- Involve the resolution of scientific or technological uncertainty.
Essentially, the R&D activities being carried out must address an area of technological or scientific uncertainty where the outcome is unclear from the outset.
Claiming the R&D Tax Credit
Following recent changes introduced by budget 2023, there are a number of changes being made to how the credit is claimed, with the changes being more favourable to the claimant. These changes take effect for accounting periods beginning on or after 1 Jan 2023. Transitional measures will be in place for a period of 1 year to smooth out the transitionary period.
Accounting periods ending on or before 31 December 2022
The R&D tax credit is first set off against the corporation tax liability of the accounting period in which the credit is being claimed. A claim may be made to have any unused credit set off against the corporation tax liability of the preceding period. If an excess still remains, a claim can be made to have it repaid to the company in three instalments over a 33-month period.
Accounting periods beginning on or after 1 January 2023
Under the new system, a company will have an option to request either payment of their R&D tax credit or for it to be offset against other tax liabilities which will provide greater flexibility to the claimant.
Where a company opts to have the credit refunded, it will be refunded as follows:
- The first €25,000 of an R&D claim will now be payable in full in year 1.
- In year 2, the second instalment will equal three-fifths of the remaining balance.
- The third and final instalment in year 3 will in effect be the remaining balance.
In addition to the above, the current limits on the payable element of the credit will be removed as part of the new system.
It is important that companies review their activities to determine if they qualify for the tax credit as the credit can prove to be a very valuable source of funding.
If you have any queries about the R&D tax credit, please contact us.