R&D tax credit available to companies of all size
Q My company has recently begun to put time and money into developing new and innovative products in the hope of growing our market share. Are there any tax reliefs available in relation to the expenditure we are incurring on Research and development?
A As well as the potential commercial benefits of successfully undertaking this development work, Irish tax law now provides a further incentive with regards to any work undertaken in the form of the R&D tax credit of 25%, available on all qualifying R&D expenditure.
The common misconception is that the Research & Development Tax Credit is only available to large companies, which employ scores of scientists in white coats, working in high tech laboratories. As a consequence of this, the R&D tax credit is not being claimed by smaller companies, due to a lack of awareness.
In reality the tax credit is available to any company, big or small, which can demonstrate that it is engaged in systematic, investigative or experimental activities in a field of science or technology. The R&D which is being carried out must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.
For example, a company may look to combine different materials in order to achieve cost efficiencies in the production process. There may be uncertainty as to whether the new mix will achieve the desired result, thus requiring R&D to determine the most appropriate mix. To the extent that the new mix results in scientific or technological advancement, R&D is likely to have been carried out.
When making a claim for R&D tax credits, both of the following criteria must be satisfied:
- The Science Test i.e. The activities for which credit is claimed are consistent with the statutory definition of research and development activities
- The Accounting Test i.e. the expenditure claimed is correctly laid out on such activities and identifiable.
The Science Test - Essentially only expenditure incurred in carrying on Research and Development activities may qualify for the tax credit. Qualifying activities must satisfy all of the following conditions. They must be:
- Systematic, investigative or experimental activities
- In a field of science or technology
- One or more of the following categories of research and development: Basic research, Applied research or Experimental development.
In addition, they must seek to achieve scientific or technological advancement, and involve the resolution of scientific or technological uncertainty
A key point for consideration is that it doesn't have to be successful. Once the intention is to achieve advancement or to remove uncertainty, then the company is entitled to claim a credit. It is worth noting the 25% R&D tax credit is in addition to the standard corporation tax deduction, thus resulting in a potential overall tax benefit equivalent to 37.5% of all qualifying R&D expenditure incurred.
This large tax saving allied with the possibility of claiming a cash rebate from Revenue, where the company has no corporation tax charge against which the R&D credit can be claimed means that all companies should now review their businesses for any possible R&D expenditure.