The new rules provide an opportunity  to review your client’s overall inheritance tax position, the terms of their will, and relevant estate planning opportunities. By Fiona Hall The Residence Nil Rate Band (RNRB) was introduced on 6 April 2017, so many of us are just starting to appreciate the intricacies of the complex legislation. This article will summarise the key points regarding the RNRB, including when it does and does not apply, what property can qualify, factors affecting the amount of the allowance, and some planning points. References to spouses are to include civil partners. The RNRB is an additional inheritance tax-free allowance where a home passes on death on or after 6 April 2017 to direct descendants. The legislation is found in the Inheritance Tax Act 1984 Section 8D-8M, with HMRC’s helpful guidance contained in its Inheritance Tax Manual. The RNRB applies whether the home passes on death via the will, under the intestacy rules or by survivorship. It generally does not apply to a lifetime gift of the home (subject to the downsizing rules, highlighted later) unless the gift with reservation rules apply. Then, for the purposes of the RNRB, the home is treated as passing on death and the allowance can apply. The legislation refers to a “qualifying residential interest”, which is an interest in a dwelling house that was the person’s residence at a time when the person’s estate included that property. A person may own multiple properties on death. In this scenario, the personal representatives may nominate which is to be taken into account for the RNRB and it can be a property let out at the time of death, so long as it has been the deceased’s home at some stage during ownership (i.e. not a buy-to-let). There is no minimum period of occupation or ownership of the property and no garden/grounds limitation applies. It can be a home outside the UK so long as it is within the charge to inheritance tax. The RNRB is being phased-in over four years starting at £100,000 in the 2017/18 tax year and increasing by £25,000 each year until 2020/21 when it will be £175,000. The RNRB is not aimed at the very wealthy and it is tapered where the net value of an estate exceeds £2 million. The “net value” is the market value of the assets less liabilities at death, but before any reliefs or exemptions are deducted. It does not include the value of any gifts made in the seven years prior to death. Where taper does apply, the RNRB is reduced by £1 for every £2 above the threshold. For clients whose estates are above the taper threshold, lifetime gifts may be considered. Married couples should consider alternative options if leaving their entire estate to the survivor on first death will lead to tapering. The allowance due on a particular estate is the lower of the RNRB and the property value (after deduction of any secured liabilities and any reliefs, such as agricultural property relief). As with the nil rate band, the legislation provides that should one spouse not utilise their RNRB, on making the appropriate claim, the surviving spouse’s RNRB is increased by the unused amount (using rates on the second death). A transfer of unused RNRB is available regardless of: When the first death took place, including deaths before 6 April 2017; How much the first estate was worth (however, this may result in tapering where the first estate exceeds the taper threshold); and Whether or not the first estate included a residence. A point of practical importance when calculating the inheritance tax liability is that the RNRB applies in priority to the nil rate band. This is relevant in determining whether there is a claim for a transferable nil rate band and/or transferable RNRB by the surviving spouse. To qualify for the RNRB, the home must be “closely inherited” (i.e. generally that the property passes to direct descendants such as a child/grandchild of the deceased, including step-children and foster children). However, the legislation also extends to spouses of direct descendants, including their widows/widowers, provided remarriage is not a factor. The RNRB does not apply if the home passes to others, including parents, siblings, nephews and so on. Should the home pass into a trust for direct descendants, eligibility to the RNRB will depend on the trust terms. Trusts under which a direct descendant has a qualifying interest in possession will qualify, as will a bereaved minor or 18–25 trust. However, a discretionary trust will not. The home does not have to be a specific legacy in the will; it can pass through the residue. However, where residue passes to qualifying and non-qualifying beneficiaries, HMRC treats each as inheriting a proportion of the home and this may lead to a restriction to the available allowance. A deed of variation could be considered in such circumstances. If the maximum RNRB is not being utilised, you should consider whether the downsizing provisions apply. These complex provisions are designed to replace the RNRB lost due to a disposal of the original home. To qualify for a “downsizing addition”, the deceased must have disposed of a home on or after 8 July 2015 and either moved to a less valuable property or ceased to own a home, and some of the estate must be closely inherited. In conclusion, these relatively new rules provide an opportunity to review a client’s overall inheritance tax position, the terms of their will, and any relevant estate planning opportunities.   Fiona Hall is Principal, Private Client Tax Team, at BDO Northern Ireland.

Jonathan Ginnelly outlines the main stamp duty considerations for those acquiring commercial property in the Republic of Ireland. The stamp duty rate on non-residential property in the Republic of Ireland was increased to 6% in Finance Act 2017. Since this rate increase, stamp duty has become a real and significant cost when it comes to property acquisitions and, in some cases, it can be a deal-breaker. While stamp duty is a cost for the purchaser, the increased rate will inevitably have an impact on the purchase price paid to the vendor so as to manage the overall cost of the acquisition. Specific provision was also introduced to ensure that the increased rate also applies to certain property holding entities, such as companies, which might have been used to transfer property indirectly to avail of lower stamp duty rates. In addition to introducing the higher rate of stamp duty on non-residential property, Finance Act 2017 introduced a new provision to allow for a partial repayment (up to two thirds) of the stamp duty paid for land that is to be developed for residential purposes. This article will look at where the 6% rate can apply to property holding entities and provide a brief overview of the refund scheme for relevant residential developments. Property holding entities Where property is held through a company (including foreign companies), a partnership or an Irish Real Estate Fund (IREF), the higher rate of stamp duty (6%) can apply on the transfer of shares, interests or units of such entities. The higher rate should only apply in the following circumstances: Where the property was acquired by the entity with the sole or main objective of realising a gain on disposal; Where the property was, or is, being developed with the sole or main objective of realising a gain on disposal when developed; or Where the property was held as trading stock. Where one of the above conditions is met, the higher rate will apply on the transfer of shares, interests or units – but only where such a transfer results in a change of control, either directly or indirectly, over the immovable property. In addition, any contract or arrangement resulting in a change of ownership and control which might not ordinarily be ‘stampable’ will also be subject to the higher rate. Where minority interests are being transferred, such that control does not change, the higher rate should not apply. However, attempts to transfer several minority interests to a person or persons acting in concert will not escape the provisions. The provision should not apply to shares in companies that hold property where the property was not acquired for the purpose of realising a gain on disposal, for development purposes, or held as trading stock. For example, companies owning and operating a hotel or nursing home, or property rental companies (where the property was acquired for the purpose of generating rental income) should not be caught by the provision. Stamp duty refund scheme To encourage the development of residential property, a refund scheme was introduced in tandem with the increased rate to effectively reduce the 6% rate by two-thirds where the land acquired is to be developed for residential use. When a greenfield site or a site with existing non-residential property is purchased for development, this would not be considered “residential” property at the date of acquisition and, as such, is subject to the 6% rate. However, post-acquisition, a refund of up to two-thirds of the stamp duty paid may be available where the property is to be developed into residential units. Such developments can be carried out in either a single phase or in multiple phases. The refund (subject to a number of conditions) is available once construction operations on the residential development have been commenced pursuant to a commencement order issued by a relevant building authority. A phased development will have a number of commencement notices attaching to the various phases of construction. The key points to remember are: The first phase of construction operations must commence within 30 months of the date of execution of the instrument of transfer; The refund for a phased development can be claimed on a phased basis, or on completion of the entire residential development; On a multi-phase development, separate commencement notices will be required for each phase; There is a two-year time frame for completion. This two-year period runs separately for each phase; and If the residential development is not carried out in a phased manner, the full two-thirds refund can be claimed following commencement of construction operations – but the entire development must be completed within two years of the commencement notice. A refund claim for each phase can be made after the issuance of the relevant commencement notice and once construction operations have commenced. The refund will be for the proportionate amount of stamp duty relating to that phase. In a multi-phase development, there could be a number of phases commencing and finishing at various stages throughout the overall development. It is important to bear in mind that the 30-month time period in which the developer must commence construction runs from the date of execution of the instrument of transfer. If the development is carried out in phases, the legislation states that the construction operations in respect of the first phase must be commenced within 30 months of the date of the instrument of transfer. The last commencement notice and respective construction operations must commence before 31 December 2021 in order to fall within the scope of the relief. As such, the latest possible date for completion of qualifying construction works is 31 December 2023. Given the very specific timeframes involved, any development needs to be carefully managed to ensure all relevant dates are complied with. If any condition or timeframe is breached, a claw back of the refund can arise, leaving the taxpayer open to additional costs such as interest. Practical issues in claiming the refund Since the introduction of the refund scheme, certain practical difficulties have arisen in the refund application process. The stamp duty return may be filed by the solicitor dealing with the property conveyance, for example. However, when it comes to the refund scheme, taxpayers may opt to use the services of their tax advisor. In such cases, the advisor must liaise with Revenue to have the stamp duty records for that particular case transferred to the advisor’s ROS certificate. This can take some time to arrange, resulting in delays in the issuance of refunds. Where there are critical cash flow issues with a development and the taxpayer is relying on the stamp duty refund for financing purposes, early engagement with the tax advisors and Revenue is advisable. In conclusion, given the growth in property prices over the last number of years, the increased stamp duty cost now constitutes a significant part of the financing of acquisitions and developments. Accordingly, care should be taken to ensure that acquisitions and related development operations are structured so as to avail of the residential refund scheme where appropriate.   Jonathan Ginnelly is Tax Director at Grant Thornton Ireland.

The digital VAT quarterly deadline bites for the first time. On 7 August, the first quarterly return deadline for businesses mandated to meet the requirements of Making Tax Digital (MTD) for VAT will arrive for those businesses with a VAT return period that ended on 30 June 2019. Businesses must use MTD for submitting VAT returns if they are VAT-registered and have taxable turnover exceeding the VAT registration threshold (currently £85,000). The first return period beginning on or after 1 April 2019 must meet the requirements of MTD. Some more complex businesses have been given an extension until 1 October 2019. Not only does the business have to use functional compatible software to submit VAT returns, but the business must also now keep and preserve certain digital records. A year-long ‘soft landing’ period will apply during which HMRC will accept the use of ‘cut and paste’ as a digital link, but only if a digital link hasn’t been established between software programs. Now that the first returns are with HMRC, what will its response be? We’ve heard that HMRC will apply a light touch approach if a business “does their best to comply” with the core requirements; only in those instances will no filing or record-keeping penalties be issued. What will this light touch approach look like and for how long will it last? These questions are yet to be addressed. We would like to hear how your first MTD submission went. Contact leontia.doran@charteredaccountants.ie to tell us. Leontia Doran is UK Taxation Specialist at Chartered Accountants Ireland.

While Alternative Performance Measures have enjoyed a rising profile, it would be folly to think that IFRS financial reporting has diminished in value. By Jamie Leavy Today’s world is fast-paced and what was the norm yesterday, in certain cases, can seem to be redundant today. We are living through a technology revolution, which has changed the corporate world unrecognisably from that of five years ago. One of the major changes is the exponential growth in the availability of real-time data that is providing existing and potential investors, lenders and other creditors (users) of companies with more valuable sources of information than ever before. This has coincided with the proliferation of Alternative Performance Measures (APMs), which provide users with information on a company’s performance and financial position. In 2016, the European Securities and Markets Authority (ESMA) released a paper on APMs that defined an APM as “a financial measure of historical or future financial performance, position or cash flows of an entity which is not a financial measure defined or specified in the applicable financial reporting framework”. APMs are commonly disclosed outside of, or as a supplement to, a company’s annual financial statements. These developments have led to a number of commentators suggesting that IFRS-based financial reporting is now of little importance and is seen as out-dated to users. It is suggested that users’ interest now focuses predominantly on APMs and non-financial information within annual reports and other announcements to provide them with an understanding of a company’s performance and financial position in order to make future investment decisions. However, before the preparers and users of financial statements place their IFRS Standards book in the nearest recycling bin, I would suggest caution in both solely relying on APMs for decision-making and diminishing the importance IFRS financial reporting provides to users. IFRS reporting Given the vast increase in information available to users, it would be somewhat naïve to expect IFRS financial reporting to have sustained its importance on a relative basis. It is logical that users will make use of APMs when predicting how a share price might move. These measures act as an important tool in deciding whether to hold, sell or buy shares in a company. However, these predictions depend heavily on one condition – the current share price being correct. This can only be the case if the underlying IFRS-based financial information is calculated consistently with other companies and is materially correct. Therefore, IFRS-based reporting, especially within the audited financial statements, remains a crucial element in the user’s decision-making process. The benefits of IFRS Comparability: financial reporting under IFRS provides a high level of transparency by enhancing the global comparability of companies’ financial statements. Users can easily compare a company’s performance and financial position to that of domestic and overseas competitors as well as to the prior year’s figures. It also provides economic efficiency by helping users identify opportunities and risks globally. It facilitates the comparison of potential investment opportunities in numerous companies globally, safe in the knowledge that the figures of each company are based on identical, sound and clearly defined accounting principles. IFRS creates a common accounting language. This level of transparency and comparability is not achieved by APMs, as they are not uniformly applied and are often uniquely adjusted at the individual company level. Not only is there a difficulty for users in comparing performance measures of different companies, it is similarly problematic to compare the current and prior year APMs. This is as a result of the various adjustments that are included or excluded in the calculation year-on-year. Accountability: the use of IFRS in financial reporting strengthens accountability by reducing the information gap between users and management. IAS 1 requires that all significant management judgement and estimates used in calculating IFRS amounts be explained within the notes to the financial statements. This ensures that users have information that provides them with an understanding of any adjustments or subjectivity involved. On the other hand, the major risk of APMs, and the reason for such regulatory interest, is the lack of accountability. In many cases, APMs lack order and structure and there is widespread concern about the potential misuse of these measures by management.   Yes, when used appropriately these measures can provide users with valuable information. However, APMs can potentially be utilised by management to adjust important figures – such as profit and revenue, for example – to show a more positive figure than the IFRS-based equivalent, or be used to ignore ‘inconvenient’ expenses by excluding them from the calculation. This has led to instances where, for example, companies have disclosed adjusted earnings figures as a positive highlight in announcements while the IFRS-based equivalent figure is actually a loss and is disclosed outside the highlights section. Further cases have been noted where a company discloses an APM in, for example, an unaudited preliminary announcement, but this measure is subsequently not repeated anywhere in the financial statements. In both examples, users need to exercise caution in interpreting these measures. They should closely analyse the adjustments being made and the associated reasoning. APMs – not all bad The intention is not to downplay the positive role that APMs, when used appropriately, can play. APMs are an important element in the communication between a company and its users. They can enhance financial analysis by segregating the effects of items that do not support an understanding of historical or future trends, cash flows or earnings. To ensure that APMs are credible, however, they should supplement the IFRS information in financial statements rather than compete with them. This requires a level of discipline regarding measurement and presentation. Working in harmony While I disagree that IFRS reporting is no longer of prime importance to users, there is room for continued improvement. Nowadays, users want all available information to better explain and understand performance; this is one reason why APMs have risen in popularity. The IASB has acknowledged that improvement is required and it is currently working on a Primary Financial Statements project. The aim is to provide better formatting and structure in IFRS financial statements, with the primary focus on the income statement. It has been suggested that this project will lead to additional subtotals, similar to current common APMs such as operating profit and EBIT, with more specific classifications of items being introduced. This should create more discipline around APMs by providing more reconcilable line items in the financial statements. The IASB has also suggested that it may require preparers to explain and reconcile APMs in the notes of the financial statements, which will provide users with a better understanding of the measures and lead to the measures being subject to audit. This project has the potential to improve IFRS-based reporting further and provide a defined and trusted link between financial reporting and APMs. It is unknown when, if any, changes from this project are to be implemented. However, in 2016, ESMA released Guidelines on Alternative Performance Measures. These guidelines are not intended to eliminate the use of APMs but instead, to ensure that APMs clarify rather than obscure the financial performance and position of a company. The prevailing principle of the guidelines is that APMs reported outside the financial statements must be consistent with the information disclosed within. The guidelines provide the opportunity for a company to present APMs while safeguarding against the manipulation of results by requiring that APMs be presented in a clear and transparent manner. The guidelines include 48 paragraphs of detail regarding the presentation of APMs, but the main aspects are as follows: APMs should be meaningfully labelled and defined; The purpose of the APMs should be clearly set out; Comparative data should be provided for all APMs; APMs should not be displayed with more prominence, emphasis or authority than measures directly stemming from the IFRS-based financial statements; Clear reconciliations should be given; and Unless there is a good reason for change, the presentation of APMs should be consistent over time. IAASA has received a number of undertakings in relation to the above aspects since the guidelines were published. Furthermore, IAASA has published a number of thematic reviews in relation to the use of APMs, namely: Alternative Performance Measures – Thematic Survey (September 2017); Alternative Performance Measures – A Survey of their Use Together with Key Recommendations: An Update (January 2015); and  Alternative Performance Measures – A Survey of their Use Together with Key Recommendations (November 2012). Conclusion The substantial increase in information available to users has meant that IFRS financial reporting is no longer the only reporting type available. The use and prominence of APMs has increased over the last five years; however, IFRS financial reporting is still as important as ever in the user’s decision-making process. The aim of every company should be to provide as much relevant and reliable information to users as possible. To achieve this, APMs will play an important role – but only when used appropriately. To ensure appropriate use, both APMs and IFRS-based reporting should work together to provide an overall view of the financial performance and position of the company. The ESMA’s guidelines will be critical in realising this goal – if companies follow the guidelines, the combined information within the financial statements should be defined, clear and reconciled in order for users to grasp and gain value from every page. Users will then benefit from the comparability and transparency that IFRS offers, supplemented by additional valuable information in the form of APMs.   Jamie Leavy ACA is a Project Manager in IAASA’s Financial Reporting Supervision Unit.

Paula Nyland considers how Chartered Accountants involved in the third sector can improve transparency and prosperity to the benefit of charities and society at large. The third sector on the island of Ireland impacts directly or indirectly on the work of every Chartered Accountant, whether as a director/trustee, audit practitioner, employee or volunteer. In the Republic of Ireland alone, the sector includes 9,500 non-profits that are incorporated as companies, more than 4,000 primary or secondary schools, and 800 friendly societies, co-operatives, trade unions, professional associations, political parties or charter bodies. Another 15,000 or so are unincorporated associations, clubs and societies. Chartered Accountants are critical to supporting and directing this sector, and it’s important that they are aware of some of the impacts of changing regulatory conditions on their practice.  Greater financial transparency and accountability Since 2014, when it was established under the Charities Act, 2009, the Charities Regulator in the Republic of Ireland has been working to bring greater public transparency and regulatory accountability to the work of the charity sector – about one-third of all non-profits. The Regulator now plans to introduce new regulations that will clarify the reporting requirements for charities in the form of an Irish version of Charities SORP. Charities SORP is a module of FRS 102, which provides guidance on financial accounting and reporting for charitable entities. It is currently mandatory for UK charities, but only recommended for charities in Ireland. Based on our analysis of all of the financial statements filed by Irish non-profits since 2015, Benefacts has discovered that just 12% of Ireland’s incorporated charities currently file financial statements using Charities SORP on a voluntary basis. This will change when the forthcoming regulations are introduced. All larger incorporated charities (more than €250,000 in income or expenditure) will be required to meet these higher standards of disclosure, and will no longer be permitted to file abridged accounts. Currently, the level of abridgement in charities’ accounts here is running at 37%, and this is something the Charities Regulator has repeatedly spoken out on – most recently after the launch of Benefacts’ Sector Analysis Report in April 2019. For the audit profession, there is a clear need to become familiar with these reporting standards, because the question is no longer whether Charities SORP will become a requirement for larger charities in the Republic of Ireland, but when. Guidelines on fundraising and internal control Even in advance of the new regulations on financial reporting, the Charities Regulator has been active in setting standards for the charity sector, with guidelines for fundraising from the public issued in November 2017 and a governance code issued at the end of 2018. These measures, coupled with the Internal Financial Controls Guidelines for Charities, have created a strong foundation for control within the regulated charity sector, in particular for the people serving on the boards of charities and non-profits. VAT repayment scheme  Elsewhere in Government, there have been measures to respond to campaigns from within the sector. Following years of lobbying to change the VAT regime for charities, Government introduced a new scheme that has made €5 million available for recovery annually by charities against VAT paid from non-statutory or non-public funds for costs after 1 January 2018. The deadline for 2018 claims was 30 June 2019. DPER Circular 13 of 2014 Without having the full force of regulations, the standards for financial disclosures promulgated by the Department of Public Expenditure and Reform (DPER) nonetheless deserve to be more widely understood by the accountancy profession. Circular 13 of 2014 is the most important statement of the disclosure standards that are expected of all entities receiving State aid, and it is the responsibility of every government funder to ensure that these are being followed. They set out the requirements for reporting every source of government funding, the type of funding provided (loan, current or capital grant, service fee), the purposes of the funding and the year in which funding is being accounted for. Abridged accounts do not meet the standards of DPER 13/2014, nor do accounts prepared using the new standard for micro-enterprises, FRS 105. FRS 105 (micro entities) When the Companies (Accounting) Act 2017 was commenced on 9 June 2017, it introduced the concept of the Micro Companies Regime, which is provided for in Section 280 of the Companies Act 2014. This allows smaller companies (with two of the following conditions: turnover of €700,000 or less, balance sheet total of €350,000 or less, and no more than 10 employees) to prepare financial statements under FRS 105 instead of FRS 102. FRS 105 provides for minimum disclosures: no directors’ report, no requirement to disclose directors’ remuneration, no disclosure of salary costs or employee numbers. In 2017, 5% of non-profit companies reported to the CRO using this standard, including some that receive funding from the public or from the State.  Charities in the UK are not permitted to report using FRS 105, but as yet there is no such regulation in the Republic of Ireland. The burdens of disclosure Many Irish non-profit organisations receive funding from more than one source – some from many sources, as will be clear from even a cursory glance at the listings of well-known names on www.benefacts.ie. As well as multiple funding sources, most major charities are regulated many times over, if you count the oversight responsibilities of the CRO/ODCE, the Charities Regulator, the Housing Regulator, Revenue, HIQA et al. The high administration and compliance burden represents a real cost – including, of course, the cost of audit fees. At a minimum, of course, company directors must confirm that the company can continue as a going concern; Charities SORP requires that trustees disclose their policy for the maintenance of financial reserves and it is expected that these will reflect a prudent approach to maintaining funds to see them through periods of unexpected difficulty. These are sensible, indeed fundamental, principles and the annual financial reporting cycle is intended to give confidence to all stakeholders that the directors/trustees fully understand their responsibilities and are fulfilling the duties of care, diligence and skill enjoined on them. The €20 million or so currently spent by non-profit companies on audit fees (as yet the public has no access to the accounts of unincorporated charities) should be money well spent. The better the quality of the financial statements, the more these can play a role in initiatives being explored by a number of Government agencies to explore cost-saving “tell-us-once” solutions, supported by Benefacts. Who is accountable? Using current data from filings to the CRO and the Charities Regulator, Benefacts reported in Q1 2019 that 81,500 people are currently serving in the governance of Irish non-profit companies and charities. 49,000 of these serve as the directors of 9,500 non-profit companies, and the rest are the trustees of unincorporated charities. All are subject to regulation, and they include many members of Chartered Accountants Ireland.  By any standard, this is a large sector with more than 163,000 employees and an aggregate turnover in 2017 of €12 billion, €5.9 billion of which came from the State (8.4% of all current public expenditure in that year). Most of this funding was concentrated in only 1% of all the bodies in the sector. Voluntary bodies enjoy some of the highest levels of trust in our society, but it has become clearer in recent years that this trust does not spring from an inexhaustible reservoir. It must be continuously invested in and replenished by the work of every non-profit, most especially in the form of ample and transparent public disclosure – about their values, their work, its impacts, and the sources of their funding. Above all, the board carries responsibility for setting a tone of transparency and accountability, and directors/trustees need to be aware of their personal responsibilities in this regard. As professionals, we are often looked to by our friends and family, by our clients, or by our fellow directors/trustees for advice or leadership. We all know that in any kind of business, the consequence of a loss of public confidence can be dire; in non-profits, it can be fatal.   Paula Nyland FCA is Head of Finance & Operations at Benefacts and Co-Chair of the Non-Profit and Charities Members Group at Chartered Accountants Ireland.

Paul Smith breaks down the three most significant changes in the latest edition of Revenue’s R&D tax credit scheme guidelines. In a recent Oireachtas debate, Deputy Mary Butler asked the Minister for Business, Enterprise and Innovation: “What is being done to ensure we reach the EU average spend? Will Ireland meet the 2020 target to spend 2.5% of GNP on research and development annually?” To which the Minister replied: “It is unlikely that many European countries will reach the target of 2.5%. Where Ireland stands and how well we are doing, we can only go on the European and global statistics we get. Under the heading, Excellent Science, a report from Science Foundation Ireland (SFI) noted that Ireland is tenth in the global scientific ranking. A few examples of our global rankings in different areas are: second in animal and dairy, immunology, and nanotechnology; third in material science; fourth in agricultural science; fifth in chemistry; and sixth in basic medical research… I have been all over the world and our 18 research centres are recognised as being par excellence throughout Europe and the world. We are doing exceptionally well.” A key part of Ireland’s national development strategy is to develop “a strong economy supported by Enterprise, Innovation and Skills”. The research and development (R&D) tax credit scheme forms part of the overall corporation tax offering aimed at fulfilling this strategy. The primary policy objective behind the tax credit is to increase business in Ireland, as R&D is considered an important factor for increased innovation and productivity. Reflecting these considerations, the Government’s Innovation 2020 Strategy aims to achieve the EU 2020 target of increasing overall (i.e. public and private) R&D expenditure in Ireland to 2.5% of GNP by 2020. The R&D tax credit scheme is administered by the Office of the Revenue Commissioners, which issued its latest guidelines on 6 March 2019. It is almost four years since the previous guidelines were published (April 2015) and in the interim, a number of significant events relating to the wider research, development and innovation (RD&I) landscape have happened: The Knowledge Development Box was introduced in 2015; The updated OECD Frascati Manual was issued in 2015; The Department of Finance reviewed the R&D tax credit scheme in 2016; An R&D Discussion Group was formed in 2017; and The Department of Business Enterprise and Innovation’s Disruptive Technologies Innovation Fund was introduced in 2018. It was expected that the latest guidelines would provide additional clarity on issues set out in previous ones, insight from the increased number of audits, and recommendations for continued best practice. There are 14 changes in all, most of which are relatively minor, and are therefore not discussed in this article. I will instead evaluate the more significant changes and briefly comment on the upcoming Department of Finance review of the R&D tax credit scheme. Change 1: Suggested file layout for supporting documentation An important consideration is that in defending a claim, the burden of proof is on the claimant to evidence their entitlement to tax credits. It should therefore come as little surprise that the principal focus of many audits is on supporting documentation. Although the legislation is silent on the nature of the documentation required to support an R&D tax credit claim, Revenue conducts audits using its own guidelines and provides a copy to the experts appointed to assist Revenue. The guidelines give indications of records that should be maintained to satisfy the science and accounting tests. The latest guidelines have, for the first time, introduced a “suggested” file layout for supporting documentation. This should be of benefit to existing claimants who have inadequate record-keeping and who are considering upgrading their systems and processes to be audit-ready. It may also be of benefit to potential claimants who are assessing what must be done to prepare a robust claim and, in time, defend it – the adage being that “your first step to claiming is also your first step to audit”. Revenue also benefits by potentially standardising the audit process and its inherent costs. At a recent audit this author attended, the Revenue inspector commented: “If we knew then what we know now, there may have been less need for the audit”. With Revenue’s increased adoption of e-auditing, a standardised R&D file structure could reduce the time and cost of on-site audits for both Revenue and claimants. Although the suggested file layout has advantages, it could be costly and administratively difficult for claimants to adopt. Furthermore, although the words “suggested” and “non-obligatory” are used, we can but assume that in time it could become a de facto requirement. This raises the question as to whether claimants would be disadvantaged in not using it or in having an incomplete file. In addition, claimants frequently receive an Aspect Query (Revenue’s R&D questionnaire, comprising 23–25 questions) into their claim in advance of a full audit. In answering the Aspect Query, a report setting out one’s entitlement to claim is typically furnished. That report is often laid out in the same format as the Aspect Query and although additional questions may be raised, the reports are not generally rejected by Revenue. Therefore, if reports in the Aspect Query format are broadly acceptable to Revenue, a suggestion is for Revenue to consider amending its Aspect Query rather than asking claimants to amend their processes. The R&D tax credit was introduced to defray the cost for claimants in the carrying on of R&D activities. There is no tax credit for the costs of record-keeping or file management. Change 2: Eligibility to claim for sub-contracted R&D activity The guidelines have reversed Revenue’s position that “outsourced activity must constitute qualifying R&D activity in its own right”. In the past, outsourced activities needed to be the R&D of the company carrying on the activities. With this change, they now must be the R&D of the claimant. This is constructive as it considers entitlement to tax credits from the claimant’s standpoint and reflects the reality of sub-contracting where the claimant lacks specific expertise and requires outside assistance to support its in-house R&D activity. The positive impact of this change will be the confidence it gives claimants to include sub-contracted activities that may previously have been omitted from claims, as the claimant could not determine whether the outsourced activities constituted R&D when performed by the contracted party. Change 3: Materials used in R&D activities, which may be subsequently sold R&D tax credit/relief schemes in other jurisdictions (such as Canada, Australia and the UK) have a legislative requirement to deduct from claims saleable products resulting from R&D activities. In Ireland, there is no such legislation, but the 2015 guidelines introduced this requirement without worked examples. The latest guidelines have updated the wording to read “where it is reasonable to consider that there will be a saleable product” and have provided three examples. Revenue is effectively placing the onus on the claimant to assess, based on a “reasonable to foresee” test, whether the materials were utilised “wholly and exclusively in the carrying on by the company of R&D activities”. This assessment seems to be at odds with the legislation, wherein other than a requirement to make a deduction for expenditure met by grant assistance, there is no reference to eligible expenditure having to be reduced for income from the sale of materials or saleable product derived from R&D. In the author’s opinion, whether materials have a post-R&D resale value should not detract from the fundamental and legislative reason for which their cost was incurred – namely, to carry on R&D activities. Guidelines do not make the law, and are but an aid to its interpretation. Department of Finance Review The Department of Finance has a duty of care over public expenditure and this year, in co-operation with the Office of the Revenue Commissioners, it will conduct its triennial review of whether R&D tax expenditure remains fit for purpose. The R&D tax scheme benefits not only claimants, but wider society also through development, employment, education and so on. However, the R&D headline cost figures do not reflect the full cost of the scheme to the Exchequer. It will be a full review (unlike 2016, which was economic only) and will cover four pillars – relevance, cost, impact and efficiency – to determine if the scheme remains valid. It will be conducted along two strands: A cost-benefit analysis (statistical in nature); and A tax policy unit analysis, involving a public consultation. It is encouraging that since the last review:  There has been no change in the R&D legislation; The OECD-compliant Knowledge Development Box scheme has come into operation; Ireland is ranked tenth in the 2018 Global Innovation Index; Ireland is ranked ninth in the 2018 European Innovation Scorecard; and Ireland is ranked fourth in the OECD Tax Database in terms of R&D tax incentives (tax and grants). Conclusion The expectations of the latest guidelines have largely been met, and hopefully the R&D Discussion Group will function as a collaborative forum to influence future updates.Yes, there is increased focus on supporting documentation, but broadly, the status quo remains. For now, you could say of the RD&I landscape in Ireland and the R&D tax credit guidelines respectively: “You rock. You rule!” The big three The three significant changes to Revenue’s R&D tax credit guidelines of which claimants should be aware are as follows: Change 1:  Suggested file layout for supporting documentation. The layout will benefit existing claimants who have inadequate record-keeping and who are considering upgrading their systems and processes to be audit-ready. A standardised R&D file structure could also reduce the time and costs of on-site audits for both Revenue and claimants. Change 2:  Eligibility to claim for sub-contracted R&D activity. The guidelines have reversed Revenue’s previous position that “outsourced activity must constitute qualifying R&D activity in its own right”. This is constructive as it considers entitlement to tax credits from the claimant’s standpoint and reflects the reality of sub-contracting, in that the claimant lacks specific expertise and requires outside assistance to support its in-house R&D activity. Change 3:  Requirement to deduct the cost of materials used in R&D and having resale value. The guidelines update the wording and provide three examples regarding saleable materials used in R&D activities. Revenue is effectively placing the onus on the claimant to assess, based on a “reasonable to foresee” test, whether the materials were utilised “wholly and exclusively in the carrying on by the company of R&D activities”. Paul Smith is Senior Tax Manager, Global Investment & Innovation Incentives (Gi3), at Deloitte.