Has it just got easier for small companies to claim the R&D Credit?

Wednesday 22 March 2017

By Mark Ludlow

Has it just got easier for small companies to claim the R&D Credit?

Revenue recently announced an administrative practice which should benefit small companies who claim the R&D credit. This note summarises the R&D credit, the announcement, and the effect it will have on small companies.

The R&D Tax Credit

The R&D Credit is part of Ireland’s tax incentive regime and complements the 12.5% corporation tax rate. The R&D Credit is a valuable tax incentive. It is worth 25% of the qualifying expenditure on research and development activities. As a company should also be allowed the standard corporation tax deduction of 12.5%, the cumulative effect is a 37.5% tax deduction on R&D expenditure.

A company must satisfy two tests to claim the R&D Credit.

1. The Accounting Test
2. The Science Test

The Accounting Test is concerned with determining whether the costs claimed as ‘R&D’ are properly attributable to the R&D project (rather than other business activities).

The Science Test is concerned with determining whether the activities pursued by the company constitute ‘R&D’ for the purposes of the credit. Essentially the company must have documented a systematic investigation to resolve a scientific or technological uncertainty in a field of science or technology. The R&D must have been conducted with the goal of achieving a scientific or technological advancement.

Companies are required to satisfy both these tests through the keeping of detailed records. Revenue’s requirements for compliance with the science test are set out below in ‘Box 1’.

Large companies have the resources to allocate specific staff to such record-keeping duties. However the requirements often pose difficulties for small companies. The science test in particular has been a source of concern for small companies.

Small companies often partly fund their R&D projects with R&D grants. Even so, management may still be concerned as to whether their R&D project would satisfy the requirements for the R&D credit and whether their documentation would be sufficient to satisfy the science test in the event of a Revenue R&D audit. [1] The recent Revenue announcement should alleviate these concerns.

Revenue Announcement

Revenue announced in eBrief 17/2017 (17 February 2017) that:

“Revenue would not, as a rule, seek to challenge an R&D tax credit claim under the science test, where:

1. an IDA / Enterprise Ireland R&D grant has been approved in respect of the project;
2. the R&D tax credit claimed for an accounting period (of not less than 12 months) is €50,000 or less;
3. the project is undertaken in a prescribed field of science or technology, as defined in regulations S.I. No. 434 of 2004, and
4. the company is a micro or small sized enterprise.” [2]

The announcement should be welcomed by small companies. While it does not remove the obligation of a company claiming the R&D credit to maintain records, it should provide small companies with greater comfort that their claim will not be challenged under the science test.

If you have any queries on the operation of the R&D tax credit please contact Mark Ludlow, mark.ludlow@rdj.ie, or any other member of our tax team [ tax ].

Box 1:

Records required to be maintained to satisfy the science test

1. A description of the R&D activities, the methods to be used and what the company seeks to achieve by undertaking the activities concerned.
2. The field of science and technology concerned.
3. The scientific or technological advancement that is the goal of the R&D activities.
4. The scientific or technological uncertainty that the company is seeking to resolve in its R&D activities.
5. Evidence that the scientific or technological advance(s) sought had not already been achieved and that the scientific and/ or technological uncertainties that the company was seeking to overcome were not already resolved or that such resolution would not be available to a competent professional working in the field, for example, evidence that a comprehensive literature review to determine the current status of scientific or technological knowledge in the area had been conducted prior to commencing the project.
6. Details of the systematic investigation, including:
   1. the hypothesis advanced
   2. the series of experiments or investigations undertaken to test the hypothesis.
   3. documentary evidence of the necessity for each major element and how it fits into the project as a whole.
   4. dated documents of the original scientific or technological goals, the progress of the work, how it was carried out and the conclusions.
   5. indicators or measures identified at the commencement of the project to determine if the scientific or technological objectives of the R&D activities are met.
   6. the qualifications, skill and experience of the project manager.
   7. the numbers, qualifications and skill levels of other personnel working on the project.

Further details on the R&D credit and the documentation required to support a claim are set out in Revenue’s R&D Credit guidelines [LINK: http://www.revenue.ie/en/tax/ct/leaflets/research-dev.pdf].

[1] R&D Credit and Grant Funding - Expenditure which is met, directly or indirectly, from grant funding will not qualify for the R&D credit. For example, if a company expends €40,000 on an R&D project, and €25,000 of that was met from an EI grant, then only the remaining €15,000 could qualify for the R&D credit.

[2] A ‘micro or small sized enterprise’ is defined in Commission Regulation 361 of 2003. Essentially it is a company with less than 50 staff and either a turnover of less than €50 million or a balance sheet of less than €43 million. Figures for any group or associated enterprises must also be included when determining if a particular company is a micro or small sized enterprise.