Research and development tax credits
 

Ian Collins, Senior Manager

Cash refunds anyone?

Recent enhancements to the Irish research and development (R&D) credit regime now provide companies with the ability to claim cash refunds from Irish Revenue. These cash refunds now offer a significant cashflow and financial statement benefit for Irish companies engaged in R&D activities.

Have you made claims for R&D tax credits?  Are you certain you are receiving the R&D benefits you are entitled to?

There has been a substantial increase in R&D activity in Ireland over recent years and this is consistent with Irish Government's policy of reaching 2.5% of GNP spend on R&D by 2013. As global economic activity shifts towards innovation and knowledge, Ireland’s future prosperity depends on its ability to create and expand scientific and technical expertise. Science and innovation are therefore critical to ensuring Ireland’s long-term competitiveness in an increasingly knowledge-driven global economy. R&D is one of the key drivers of productivity and growth, and raising R&D levels in business is, therefore, a key priority for the Irish Government.

How does the R&D tax claim work?

The R&D regime provides for a tax credit of 25% for qualifying R&D expenditure incurred in accounting periods commencing on or after 1 January 2009 (previously 20%). The credit applies to incremental qualifying R&D expenditure incurred by a company in respect of R&D activities carried on by it in the EEA area (European Economic Area which includes the EU, Norway, Iceland and Liechtenstein). The credit is available for incremental qualifying R&D spend over qualifying R&D spend in 2003.

The credit is in addition to any existing deduction or capital allowances for R&D expenditure. Therefore, effective tax relief of up to 37.5% may be obtained for R&D expenditure falling within the scope of this scheme. If the amount of the qualifying expenditure exceeds a company’s corporation tax liability for a period, the excess credits may be refunded to companies by Irish Revenue over a three year period.

The R&D credit system is separate from grant incentives (e.g. R&D capability grants, Research, Technology & Innovation grants etc.). Both can be claimed, however, the allowable expenditure for R&D credit purposes is computed on a net of grants basis (i.e. there is no double dipping).

What is R&D?

The key to note about the Irish R&D regime is that eligible R&D does not have to be carried out in laboratories. This is a common misconception about the regime. Qualifying R&D extends far beyond the typical "blue sky" research activity and includes a broad range of activities.

The basic criteria rely on the project seeking to achieve a scientific or technological advance while attempting to overcome scientific or technological uncertainty.

It is widely recognised that in the technology sector R&D occurs in several disciplines such as software engineering and hardware devices.

Our experience shows that the definition of R&D for tax purposes extends beyond these fields and can include activities that occur in the wider business areas, such as manufacturing operations and assembly processes, regulatory certification and business services.

Examples of areas which may contain potentially eligible R&D

• Design, construction, and testing of systems, prototypes, devices or processes, such as new hardware or software components, digital interface and control systems
• Integration of legacy and new systems, for example following corporate mergers or acquisitions, adoption of an Enterprise Architecture or externally with partners for joint ventures
• Data intensive activities, including, collection, storage and analysis, distribution and retrieval; defining or working with new or emerging data models and metadata standards, integration with third party content
• Modification and improvements to existing processes or systems to improve throughout or increase efficiencies; establishing capacity, performance, scalability, availability, security
• Development of new or improved techniques or technologies in response to changes in health, safety and environmental legislation
• Investigative work and technical problem solving performed by engineers or technicians, that is, over and above routine troubleshooting

The above examples represent only a fraction of the types of potentially eligible activity. There are many other areas to explore within different fields of science and technology. As an example, the following fields often contain eligible R&D activity:

• Natural Sciences - including computer sciences, software development, astronomy and space sciences, chemical sciences, environmental sciences, and biological sciences
• Engineering and Technology - including civil engineering, electrical engineering, chemical engineering, mechanical engineering, the science and technology of food production
• Medical Sciences - including basic medicine, clinical medicine, and health sciences
• Agricultural Sciences - including forestry, fisheries, horticulture, and veterinary medicine

If your business is in any of the above fields, you should talk to us to explore the opportunity of this regime.

How can Ernst and Young help?

The key to unlocking your R&D tax benefit is an in-depth understanding of:

• The scientific and technological issues involved in your business
• The business processes in your organisation
• The tax rules and guidance on the meaning of R&D for tax purposes and how this applies to your industry sector
• The ability to identify and capture all eligible R&D activities throughout your organisation
• An eligible claim requires a well structured approach which identifies eligible activities, quantifies eligible expenditure, and is substantiated through robust supporting documentation.

Ernst and Young have a dedicated and highly specialised team focusing solely on R&D tax claims. This multi-disciplinary team is made up of engineers, PhD's, industry specialists and tax professionals. We have helped many clients identify their R&D spend and the documentation required to support such claims.

We have liaised regularly with the Irish Revenue on successfully agreeing R&D claims and have developed a strong working relationship with Irish Revenue in this regard.

We would be delighted to meet with you to explore how this regime may offer benefits to your business. If you wish to discuss this opportunity further, please contact Ian Collins or your regular Ernst & Young contact.