Q. My company has incurred significant R&D expenditure during the past few years. The product is now ready to go to market and I hope to be profit-making within two years. Can I claim tax relief for the expenditure incurred to date and how do I claim it? Are there special rules for claiming R&D costs?
A. The company may be able to avail of an R&D credit of up to 25 per cent from January 1 2009. The excess of spend over what the company spent in 2003 qualifies for the relief. You also get a deduction in calculating your taxable profits, so that you effectively get relief of up to 37.5 per cent of the cost of R&D.
Sales for 2009 are €105,000 and R&D expenditure is €25,000. R&D incurred in 2003 was €5,000. The company’s corporation tax liability is calculated as follows:
Any R&D credit which cannot be used in the year in which the expenditure is incurred can be offset against the prior year’s corporation tax liability and any excess can be carried forward indefinitely for offset against future tax. From 2009 onwards there is also the alternative option of having any excess or unused credit repaid to you. The payments will be made in three instalments across three accounting periods. The refund is limited to the greater of the corporation tax paid in the prior 10 years or the amount of PAYE, PRSI and levies that the company is required to remit in the period in which the expenditure was incurred.
From January 1, 2009, your claim for relief must be made within 12 months of the accounting year end eg, if your accounting year end is December 31, 2008, your claim for relief for expenditure incurred in 2008 must be submitted to Revenue by December 31 2009. Prior to this there was a four year time limit for applications.
To claim relief incurred in 2004 to 2007 inclusive, you should have lodged a protective claim with Revenue by 31 December 2008. If you did, you must provide full details of the claim by 30 April 2009.
Allowable expenditure includes costs incurred on the following activities:
Engineering, design, operational research, mathematical analysis, computer programming, data collection, testing or psychological research.
Indirect support activities, including maintenance, security, administration, and clerical activities, finance, and personnel activities.
Ancillary activities, which are integral to the undertaking of R&D activities, such as paying staff and associated costs, leasing labs and maintaining R&D equipment including computers used for research purposes.
The R&D must be carried out by the company in a European Economic Area country and the company must maintain a record of its R&D expenditure. The expense must be otherwise allowable for tax purposes in Ireland. Payments to universities or third level educational institutions to carry out R&D qualify but are limited to five per cent of the R&D carried out by the company. Payments to unconnected sub-contractors of up to 10 per cent of the company’s total R&D spend will also be allowable.
The administrative process for smaller claims is simplified if the company has received a grant from Enterprise Ireland under a Research Technology and Innovation scheme. If the claim is for less than €50,000 and the project is in a prescribed field of science or technology Revenue will not send the claim to an independent expert.
Expenditure on buildings or structures used for R&D
A tax credit of 25 per cent is also available for expenditure incurred on the construction or refurbishment of a building or structure in Ireland which is used at least 35 per cent for R&D activities. The relief can be clawed back where the building or structure is sold or ceases to be used for R&D purposes in the 10 year period from when the credit was first claimed.
Claiming tax relief
The relief is claimed in the company’s corporation tax return in the same way as any other relief. Supporting documentation only needs to be submitted if / when requested to do so by Revenue.
Your tax advisor should be able to assist you in making an application where necessary to Revenue and in maximising the amount of the relief that can be claimed.