Whether you are familiar with claiming the R&D Tax Credit or have just thought about the claiming the incentive for the first time, the must-know points about the R&D tax credit scheme are the same, says Ken Hardy.
The R&D tax credit can be a significant source of tax saving / cash. The relief that you can receive is 25% of the qualifying expenditure incurred in carrying out qualifying R&D activities, making the R&D tax credit scheme an attractive tax incentive.
Loss making companies can also benefit from the R&D Tax credit by receiving a cash refund of the credit, subject to some conditions.
Recent figures from government and the Revenue indicate that almost 1,500 companies claim the R&D tax credit annually, with over 421m being claimed in 2013, conversely circa 20m in settlements are made through Revenue's R&D audit programme. Included among the reasons for the settlements are the discovery of non-qualifying R&D activities and non-qualifying expenditure.
Qualifying R&D activities are those that meet the statutory definition of R&D activity. Those are systematic, experimental or investigative activities, which seek scientific or technological advancement in a field of science and technology and involve the resolution of scientific or technological uncertainty. The activity can be either basic/applied research or even experimental development. The latter being the most frequent type of R&D for tax credit claims.
Qualifying expenditure incurred by the claimant company in qualifying R&D activity include direct salary costs, materials and some overheads. Payments to third parties to carry out qualifying R&D activity can also be included in the claim, subject to certain restrictions.
Claimants can use third parties to assist them in their R&D activities. The legislation is drafted in a manner that acknowledges that a claimant is unlikely to have all the resources available in house to carry on the R&D activity. That said, there are some limitations that need to be considered.
Qualifying expenditure can also include the cost of construction or refurbishment of a building or portion of building used for qualifying R&D activities. Furthermore, provided certain criteria are met, a company has the option to transfer part of the R&D tax credit to key R&D personnel to reduce their personal income tax bill.
The claim must be filed twelve months from the end of the accounting period in which the qualifying R&D expenditures were incurred. Under the self-assessment system, when a company is satisfied that the requirement for the claim are met, then the only requirement is to insert the relevant details of the claim in the CT1 return. If the deadline is missed then no claim can be made subsequently.
Revenue can audit any R&D tax credit claim made up to four years from the end of the accounting period in which the claim has been filed. Revenue often ask claimants to provide information outlining the basis of the claim made, as well as carrying more formal desk and field audits.
Claims found to be overstated or not meeting the legislative requirements have to be repaid either in part or in full, together with interest, and sometimes penalties.
Revenue regularly update their own guidance and it is important to keep an eye on their latest positions: http://www.revenue.ie/en/tax/ct/research-development.html. The guidance provides a good view of Revenue's interpretation of the R&D tax credits statutory definitions, but remember its not the law!
Companies availing of the relief, have an obligation to maintain records of the expenditure incurred in the carrying on of the qualifying R&D activity. The records, have to be both a) contemporaneous, meaning that they have been prepared while the R&D activity was being carried out, and b) relevant, meaning that they have to be related to the R&D activity carried out. Both the quality and quantity of the records maintained may affect the outcome of a Revenue audit.
The R&D tax credit is a valuable incentive to support companies in many sectors from manufacturing to IT to healthcare, and beyond. The key issues in making a claim include understanding the merits of the R&D activity carried out and related expenditure incurred and the quality of the supporting documentation supporting the claim. In our experience, a claim that is properly prepared prior to filing a claim are likely to withstand a Revenue challenge.
Ken Hardy leads the R&D Tax Team at KPMG
This article originally appeared in InBusiness Magazine and is reproduced here with their kind permission.