This is a guest post written by Noel Cunningham, international tax liaison partner at Mazars Ireland.
The 31 December deadline for claims is fast approaching. This deadline applies to all companies with a December 2010 year end. Failure to submit the claim on a timely basis could have significant adverse cashflow implications for your company.
What Is The R&D Credit?
In an endeavour to encourage foreign and domestic organisations to undertaken R&D activities in Ireland, a tax credit system was introduced in 2004. Qualifying R&D expenditure generates a 25% tax credit for offset against corporate tax. This credit is in addition to the existing tax deduction which can be taken for the expenditure. In other words, an effective deduction of 37.5% is available for each euro of expenditure incurred on qualifying R&D activities.
The research and development must be undertaken within the European Economic Area. It is calculated on incremental R&D expenditure which is in excess of the amount spent in the base year (2003).
What Expenditure Qualifies?
Any expenditure wholly and exclusively incurred by a company in the carrying on by it of its R&D activities can be taken into account for the purposes of the calculation of the credit amount. In practice, qualifying expenditure includes salaries, rental costs, overheads (e.g. light and heat, telephone etc.) and plant and machinery. The qualifying expenditure amount is calculated net of any grants which may have been received.
What Type Of Company Can Avail Of The R&D Credit?
There is a general misconception that only large multinational organisations undertake R&D activities. This is not the case. Many small to medium sized Irish entities operating in, for example, the food, technology, computing, financial, engineering and agricultural sectors are undertaking R&D. The availability of an R&D credit can be particularly advantageous from a cashflow perspective to smaller organisations.
The attractiveness of the Irish R&D tax credit system is highlighted by the recent announcement by IBM. The Fortune 500 company opened its Smarter Cities Technology Centre last month and established the first IBM Research & Development Laboratory in the EU. This announcement represents an investment of up to €66 million and 200 additional new roles.
My Company Is Loss Making - What Benefit Is The R&D Credit?
Where a company has excess R&D credit it can opt to carry forward the excess indefinitely to utilise in future periods, surrender to group members or to have the excess refunded.
Refunds are spread over a 3 year period. The first instalment (33% of excess) will be paid not earlier then the due date for the Corporate Tax Return for that accounting period. The second instalment (50% of the excess) will be paid not earlier than 12 months after the 1st instalment date. The third instalment of the remaining balance will be paid not earlier than 24 months after the 1st instalment date.
How Is The Credit Reflected In Financial Statements?
Irish organisations have the option of preparing their accounts under the terms of Irish GAAP or IFRS. These accounting standards permit the benefit of the tax credit to be reflected “above the line”. This has an immediate positive impact on the overall unit cost.
The R&D tax credit is a key component in the overall package of tax incentives available in Ireland. This is coupled with the ability to obtain 100% tax depreciation on the cost of acquisition of intellectual property.