Updated Revenue R&D Tax Credit Guidance 2015

Updated Revenue R&D Tax Credit Guidance 2015

These guidelines are the ninth iteration of Revenue’s R&D guidance.

These guidelines are the ninth iteration of Revenue’s R&D guidance.

On 14 January 2015, Revenue published updated Research & Development Tax Credit Guidelines (“Guidelines 2015”), dated January 2015. These guidelines are the ninth iteration of Revenue’s R&D guidance, and would appear to represent the most significant change in administration of the R&D regime since it was introduced in 2004. Since then, further updates with minor adjustments have been published, indicating Revenue’s intention to update its guidance on an incremental basis.

These new 2015 guidelines include a number of very significant changes to previously published guidance, which will, in our view, have a negative impact on many taxpayers’ R&D tax credit claims. The guidance is not legally binding, but is obviously indicative of Revenue’s position on these matters. It is also interesting to note that while the legislation has not changed, Revenue is introducing new guidance with respect to a significant number of areas, as detailed below.


Guidelines 2015 states that "costs which are not wholly and exclusively incurred in the carrying on of the R&D activity, including indirect overheads such as recruitment fees, insurance, travel, equipment repairs or maintenance, shipping, business entertainment, telephone, bank charges and interest, do not qualify as relevant expenditure” when claiming the R&D tax credit. However, Revenue also states that “overheads which are wholly and exclusively incurred directly in the carrying on of the qualifying R&D activity, for example power consumed in the R&D process, qualify for the credit" (4.1).

Revenue guidance has become prescriptive in the view of the types of costs that can qualify for the R&D tax credit. The legislation states that R&D expenditure means expenditure "that is wholly and exclusively incurred in the carrying on by a company of R&D activities"; it does not mention any specific type of expenditure. Previously, Revenue accepted that ancillary and indirect activities that supported the R&D activity could qualify – this was set out clearly in the February 2011 guidance; Revenue has now reversed its position on this point. In our view, any cost that meets the legislative definition can qualify.

Employee costs

Guidelines 2015 contains a new section on employee/staff costs (4.2), where it is stated that the costs of rewarding an employee engaged in qualifying R&D activities relate to the extent to which the employee is engaged in such activities, i.e. employee costs can be considered on an apportioned basis.

Allowable costs include salaries, pension contributions, bonus payments, health insurance or other items included in the reward package paid to R&D employees.

Overheads associated with the individual’s employment, such as HR costs, payroll team costs, canteen costs or similar, are not considered by Revenue to be eligible costs, as they are of the view that such costs are not incurred in the carrying on of R&D activity.

Guidelines 2015 also specifically focuses on the role of proprietary directors in R&D activity, stating that payments to such controlling persons which are significantly out of step with the normal emolument practice of the company will generally not be regarded by Revenue as eligible expenditure.

We welcome Revenue’s position that the fully loaded costs of an employee represent eligible expenditure for the purposes of the credit – some Revenue officials were of the view that these costs were ineligible. However, in our experience it is likely that Revenue’s requirement for companies to maintain time-keeping records, something that the legislation does not prescribe, will place an additional administrative burden on many companies. We hope that Revenue will take a pragmatic view of the adequacy of other types of evidence to support the reasonableness of time allocated to R&D activities, as it has done in the past.


Guidelines 2015 contains a new section on the treatment of materials used in the course of an R&D activity (4.6 & 4.7). In this section, Revenue states that while a company can use raw materials during the course of an R&D activity that might have a commercial use once the R&D has concluded, the ‘the lower of cost, or net realisable value’ of any material or saleable product which remain after the R&D activity should be deducted from the expenditure claimed as part of the R&D tax credit.

Revenue goes on to say that “Expenditure which is incurred on qualifying R&D which is carried on as part of the trade activities of a company may qualify for the credit. In these circumstances the eligible expenditure is limited to additional expenditure that is incurred wholly and exclusively in the carrying on of the qualifying activity.”

This is a particularly negative change in the guidance and we believe it is inconsistent with the legislation, which allows a company to claim for “expenditure incurred” (i.e. the gross cost) on R&D activity, and not the “net cost”.

Outsourced R&D

Guidelines 2015 emphasises that outsourced activity “must constitute qualifying R&D activity in its own right” (6.1). This differs to Guidelines 2012, in which outsourced activities were considered to be “those activities to be used in connection with” R&D activities.

It is also stated that the use of agency staff in the carrying on of R&D activities is considered to be outsourcing, and as such the related costs should be treated in accordance with outsourcing rules. This amendment appears to bring to an end a longstanding Revenue practice of accepting outsourced activities that directly contribute to the R&D activity as being eligible, subject to the 10% outsourcing limit.


When a qualifying building is constructed for the purpose of R&D, Guidelines 2015 states that the credit is available from the date on which the building was first brought into use for the purpose of a trade. Guidelines 2015 now clarifies that where expenditure is incurred on the construction of a building which spans two or more accounting periods, “the aggregate expenditure is treated as incurred from the date that the building is first brought into use”. Therefore, the 12 month claim period applies by reference to the date the expenditure is treated as incurred i.e. the date the building is first brought into use.

In cases where a qualifying building is refurbished for the purpose of R&D, the credit is available from the date on which the refurbishment is completed, or an earlier date to be decided by the company, beginning not earlier than the date the refurbishment commences (5.1).

This new guidance directly contradicts the position adopted by Revenue in a number of specific cases, where Revenue officials strenuously argued that claims had to be made within 12 months of when the building expenditure was incurred and not when the building came into use. This change in position is welcomed.

Plant & machinery (P&M)

Guidelines 2015 states that expenditure on P&M may qualify for the R&D tax credit where such expenditure also qualifies for capital allowances (5.3). Helpfully, Guidelines 2015 now include an extract from Tax Briefing 59 which clarifies that Revenue are prepared to accept that expenditure on plant and machinery may be treated as incurred on either (1) the date the plant and machinery is first brought into use for the purposes of a trade or (2) the date the expenditure becomes payable. This latter option is subject to a condition that the credit will be clawed back if the plant or machinery is not brought into use for the purpose of a trade within two years of the expenditure becoming payable.

We welcome the inclusion of the Tax Briefing 59 (first published in 2005) wording as it helps clarify when a company can claim the R&D tax credit on P&M.

Base year

Guidelines 2015 clarifies Revenue’s apparent confusion around the treatment of a company’s base year upon acquisition, stating that an acquired company’s base year does not travel with it (7.7). Previously, many Revenue officials were of the view that the base year travelled on acquisition. KPMG made a detailed technical submission on this point and we are pleased that Revenue now agrees with our interpretation.

In addition, Finance Act 2014 removed the requirement of a company to refer to the 2003 base year when claiming the credit, applicable to accounting periods commencing on or after 1 January 2015. Revenue’s 2015guidance has been updated to reflect this amendment (7.2). This is a very significant and positive development in the legislation.


In the section outlining the type of records that must be maintained to satisfy the science test (8.1), Revenue has placed stronger emphasis on the requirement to determine the state of the art prior to the R&D activity. Now required is “evidence that the scientific or technological advance(s) sought had not already been achieved and that the scientific and/or technological uncertainties that the company was seeking to overcome were not already resolved or that such resolution would not be available to a competent professional working in the field, for example, evidence that a comprehensive literature review to determine the current status of scientific or technological knowledge in the area had been conducted prior to commencing the project.”

There is also stronger emphasis on the requirements for documentation in Guidelines 2015 (3.1), with Revenue stating that “failure to keep… documentation may, in the event of an audit, result in the claim for the R&D tax credit being disallowed.”


The section addressing software development has been expanded in an attempt to satisfy the need for appropriate guidance in relation to software development (3.7). Guidelines 2015 state that “large scale projects using formal project governance methodologies each phase in a project life-cycle will have clear deliverables and associated resource assignments and therefore the tracking of qualifying expenditure should be a relatively straightforward exercise.” In our experience this is not always as straightforward as the Guidelines suggest. The Guidelines go on to note that “smaller scale projects, although requiring appropriately defined project deliverables and expenditure tracking protocols may have less formal governance methodologies in place.”

Furthermore, Revenue for the first time now recognise that some agile development methodologies such as Scrum and similar techniques are systematic in nature. Revenue also recognises that there is “a significant amount of ground-breaking software development taking place in Ireland across a range of sectors that is delivering real advances in science and/or technology and involves the resolution of scientific or technological uncertainty.”

The following are listed by Revenue as examples of software development activities that do not qualify for the R&D tax credit:

  • User acceptance testing designed to satisfy users as to the accuracy and completeness of the product rather than to test feasibility or capacity; 
  • Development work aimed at packaging a product for market where no scientific or technological challenge exists; or 
  • Inclusion of features or functionality where no scientific or technological challenge exists.

If you have any questions on how the changes to Revenue’s guidelines might impact your claim, please contact Ken Hardy at ken.hardy@kpmg.ie, or on 01 410 1645.

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