The research and development (R&D) tax credit is open to companies in Ireland that undertake qualifying research and development activities in Ireland or within the EEA.
The R&D tax credit can be a significant source of tax saving / cash because the available relief is 25% of the qualifying expenditure incurred in carrying out qualifying R&D activities. Loss-making companies can also benefit from the R&D tax credit by receiving a cash refund of the credit, subject to certain conditions.
Qualifying R&D activities are those that meet the statutory definition of R&D activity—i.e., systematic, experimental or investigative activities that seek scientific or technological advancement in a field of science and technology and that 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).
A “qualifying expenditure” incurred by the claimant company in qualifying R&D activity includes direct salary costs, materials, and some overheads. Claimants can use third parties to assist them in their R&D activities. Accordingly, payments to third parties to carry out certain qualifying R&D activity can also be included in the claim, subject to certain restrictions.
A qualifying expenditure can also include the cost of construction or refurbishment of a building or portion of building used for qualifying R&D activities. Also—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 individual (personal) income tax liabilities.
The R&D claim must be filed 12 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.
Irish 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 was 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 must be repaid either in part or in full, together with interest, and sometimes penalties.
Companies claiming the R&D tax credit must maintain records of the expenditure incurred in the carrying on of the qualifying R&D activity. These records must be (1) contemporaneous, meaning that they have been prepared while the R&D activity was being carried out; and (2) 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 an Irish Revenue audit.
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