There have been continuous improvements to Ireland’s Research and Development (“R&D”) Tax Credit since its introduction in 2004.
The 2015 Budget also made a major amendment to the R&D Tax Credit. The 2003 “base year” will be removed entirely from 1 January 2015.
What Is The R&D Tax Credit & Who Qualifies?
A credit of 25% is available on qualifying R&D expenditure. This 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 on qualifying R&D expenditure.
A company which carries on a trade in Ireland, undertakes R&D activities in Ireland or within the EEA and incurs qualifying expenditure is entitled to the credit.
Improvements To The R&D Tax Credit Since Its Introduction In 2004
Incremental Expenditure Over The Base Year
The concept of a base year was introduced for calculating the qualifying expenditure. In 2008 the base year was fixed as 2003. The R&D tax credit in any year is the incremental expenditure on qualifying expenditure over qualifying expenditure in the base year. So for example, if qualifying expenditure in any year prior to 2012 is €300,000 and the qualifying expenditure in 2003 is €150,000. Then the incremental expenditure is €150,000. The R&D tax credit is 25% of €150,000 i.e. €37,500.
In the last three years the minister has reduced the effect of the base year in increments of €100,000. This year’s budget removes entirely the base year from 1 January 2015. This will enable companies to claim the R&D tax credit at 25% on all eligible expenditure.
Use Of Universities & Sub-Contractors
A company may subcontract out part of its R&D activities to a university or institute of higher education in the EEA to carry out R&D work on behalf of the company. Limits apply in relation to the amount of work which can be subcontracted.
Monetisation Of Excess Tax Credits
A company which cannot offset its R&D tax credit due to losses in the current or previous year may obtain a refund over a three year cycle.
Payment To Key Employee
In 2012 a provision was introduced as a support to hiring and retaining “key employees”. The provision allows the company to transfer the R&D credit to key employees provided certain conditions are satisfied. This allows the credit to be converted to tax efficient bonuses for the R&D team.
Enhancements To Existing Intellectual Property “IP” Regime
There are also improvements announced in this year’s budget to the capital allowance regime for expenditure on IP. The current 80% cap on the aggregate amount of allowances and related interest expense that may be claimed will be removed.
This year’s budget also detailed the introduction of a “Knowledge Development Box” system which will enhance Ireland as a very favorable location for the development of IP. It is intended for consultations on the development of the regime to start immediately and once the OECD and the EU have completed their evaluations and considerations on the current systems in other countries, the legislation will be introduced into Ireland.
Irish R&D Tax Reliefs Continue
Through the constant improvement of favourable taxation reliefs in relation to R&D and IP, Ireland has become a very favourable location for innovative and research orientated companies.
Please note that this commentary does not purport to be a comprehensive review of the Irish R&D Tax Credit regime. Detailed appropriate advice should be taken before any particular transaction is entered into.